Would the founders in your portfolio let you in on the cap table if you weren’t an investor? If you had no money? If they could only borrow your brain for two hours every three months, and that’s it?
The uncomfortable truth is that most founders won’t.
But to find the founder who will take that deal is the person you want to be focusing on. They’re the archetype of founder you want to win — that you put your whole heart into perfecting your craft for that founder.
Play to your strengths, not your weaknesses. Where do you have home field advantage?
Why does this matter?
All cards on the table, it won’t matter if you plan to stay a boutique VC firm or angel whose check size for an investment never goes past $250K. Even better if you don’t have any pro rata. But if you plan to institutionalize your firm — and I don’t mean to say this is the only way to institutionalize — you need to hire. To hire, you need enough management fees to support a team of that size. And to get enough management fees, most of the time, that requires you to scale your fund size.
Whereas in Fund I and maybe II, you played the participating investor. Squeezing in great deals. And everyone’s your friend. Founders love you. Your co-investors love you. With larger funds, you may end up scaling your check size. If you don’t, you start diversifying your portfolio more and more. And most large LPs prefer concentrated portfolios. Why?
They often do the diversification work in their own model. They pick their own verticals and stages they want exposure to. The product they want to buy is not to be their portfolio for them, but that it is just one asset in a larger portfolio. A lot of LPs also fear diversified portfolios in managers because at some point, managers will be investing in the same underlying asset. No LP wants to invest in 10 funds and have four of them all be investors in Stripe. If that’s the case, they might as well invest directly in Stripe via co-investment.
But at the end of the day, if your checks are bigger (along with ownership targets), it’s hard to always be 100% friendly with other investors since they have their own mandates. And at some point, the founder is forced to pick: you or any of those other interested investors.
And for you to win that deal, you must have something enduring that founders want outside of capital.
Examples
Of course, there are different ways to prove that you can win deals to your prospective LPs. The list below is by no means all-encompassing, but may help in giving you an idea of how people who have walked the path before you have done so.
- Being chosen as the independent board member in other companies you didn’t invest in (Kudos to Ben Choi for sharing this one in our episode)
- Having a platform to generate customers/leads for your portfolio companies. Like Packy McCormick‘s Not Boring or Harry Stebbings‘ 20VC.
- Winning pro rata in past subsequent rounds
- Even better if super pro rata (rarely happens though, especially after Series A)
- (Co-)Leading rounds (met an emerging GP last year who syndicated the whole $2M round)
- Repeat founders (with previous exits >$100M) let you invest in oversubscribed rounds with a check larger than $250K
- Founders letting you invest on previous round’s terms (or highly preferential treatment)
- Incubating the company
- Evidence or repeatable ability for you to pre-empt rounds before founders go out to fundraise
- Some combination of the above
In closing
Unintentionally, this blogpost is the unofficial part two of my first one on the topic of sourcing, picking, and winning. Part one was on sourcing. This one is on winning. No guarantees on picking, but who knows? I may end up writing something.
For the uninitiated, this was said by both Ben Choi and Samir Kaji on the Superclusters podcast. That to be a great investor, you need to be great in at least two of three things: sourcing, picking, and/or winning. If you only have great deal flow, but don’t know how to pick the right companies that come your way or have the best founders pick you, then you don’t have an advantage. If you’re really good at winning deals, but no one comes to you or you pick the wrong deals to win, then you also don’t have anything. You need at least two. Of course, ideally three.
But as you institutionalize, the third may come in the form of another team member or as you build out the platform.
Photo by Long Truong on Unsplash
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
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