Fundraising Lessons from a Founder-Turned-VC

Dec 02, 2020

by Sailesh Ramakrishnan

I became a VC partner quite by chance. I did not follow the traditional path of MBA, followed by an associate’s job to eventually become a partner. Nor was I a successful entrepreneur who had made a fortune and was looking to pay it forward.

I was simply a software engineer who, along with my colleagues and friends - now fellow partners, was looking into whether newly emerging data about companies could be used to say something informative about them. As we looked into the data we sourced across inputs like Crunchbase and social media, we wondered whether we could trust the algorithm enough to write a check. If that turned out to not be the case, then we would explore less strenuous use cases for what we built, like marketing, hiring or product recommendations. However, much to our surprise, the data did show significant promise in our back tests and in 2015, I was on the path to becoming a VC.

I didn’t like VCs much at that time. The narrative around them being vulture capitalists coupled with my own experience fundraising for the startup I co-founded left me with a mediocre impression. Later on, I came to realize that this was more from my lack of knowledge about how VCs operate and my incorrect expectations from them.

So in this article I would like to contrast common founder misconceptions and some of the questions I once had as a co-founder, with what I know now as a Founding Partner at a VC firm:

VCs don’t understand my company!

Many founders feel that with a great presentation of their amazing idea and progress, VCs should be jumping at the chance to invest in them. And more often than not - even for some of today’s biggest successes - when that doesn’t happen. It leads many founders to think most VCs don’t really understand their idea or are unable to see the potential.

While this might be true in rare cases, I have found that most VCs do get it. Many have highly entrepreneurial, analytical,and technical backgrounds with a deep understanding of the landscape. The reason why they are not jumping up and down is that they have seen several such pitches and hence have learned to discount your optimistic projections or can already see the flaws from past experience. For example, when a company claims that their margin will grow to be 4X the current value in 12 months, that is usually something VCs have seen most companies fail at.

VCs don’t want to take a risk! Isn’t that what they are supposed to do?

Founders sometimes feel that even though they have a great idea, the unknowns are inevitable, and VCs should be willing to take a chance on them. Hence they are surprised when a VC declines based on those unknowns. While VC is among the riskiest class of investments, the risk appetite varies between various firms. More importantly, VCs are more comfortable taking some types of risks but not others.

So when you get such an answer from a VC, the stated reason might be a dominant component but it might be the aggregate risk and the type of risk that might be the underlying cause for that decision. To illustrate this, consider a VC who has had some negative experiences with investing in a sector ahead of product market fit. To overcome that negative experience, all other factors – including team and current traction – would have to be off the charts.

It’s only $XM and they are a $B fund, why can’t they invest?

I have seen founders express surprise at times when a large fund declines to invest what might seem like a relatively small amount given the size of the fund.

Leaving aside the obvious that every dollar is expected to earn a return, the main reason is usually due to the fact that each investment requires people to monitor and manage it and that is usually a constrained resource. This correlation between attention and size of the check might mean that the sweet spot for a good startup-investor relationship depends on the size of the check needed relative to the size of the fund.

Isn’t it better to hold out for bigger checks or bigger investor names?

It’s great to be a hot startup grabbing the attention of multiple firms and well-known names. But there is more to be gained from the relationship than dollars and name recognition - investing partners should truly understand and appreciate your vision, believe in you and your team and be in it with you.

I see founders orient to the dollars and the name at the expense of the right mix of knowledge and experience. VC’s need to make a return on their investment, but that doesn’t mean their approach to helping you succeed is always the right fit. I encourage founders to consider the backgrounds of the partners and firms they are pitching, and assess how intimate of an understanding they have of the ecosystem you operate in. While scoring a check from a notable Silicon Valley firm may seem like the goal, the more specific expertise the firm has in where your business goals lie, the higher-quality recommendations and support you’ll receive.