How to pick which VC to partner with?

How to pick which VC to partner with?

I get this question many times from founders. It’s a trick question.

First, you usually don’t pick your VC, they pick you. It’s not like you shop your pitch to ten VCs, and all ten will surely extend you a term-sheet so you “chose” them.

You do want to pitch VCs that match your NEEDS. Then, if you are lucky to have more than one term-sheet, then you have a choice to make. Then you can get into the question of how to pick which VC to partner with.

So how do you pick which VCs to pitch? That is the big question. As you hope that one of them will pick you, and together you will make history and money.

The answer depends on what you are looking for, and what you NEED. Then, there are some hard and fast rules which we will cover at the end.

What do you NEED?
1) If you are a first-time founder, you may want to pick a partner that is not new to first-time founders. It’s that simple. You do not want to add more stress and risk to your journey. If you realize that the VC firm you “want” usually backs only seasoned founders, and only with checks of $25M and… they are not the perfect match for you. They are not what you NEED.

2) If are you located away from the VC – you want to make sure they will come visit you. Make sure they are comfortable with the talent pool in your area. You do not want to be in a relationship where only you travel to the investors. They need to be seen by your team, at your HQ – as they are part of the foundation and stability of your company. If they will not come to you, it’s not what you NEED.

3) If you are making widgets, you want to pick a VC that invests in such widgets. You do not want to be the one-off investment. Investors who know your industry and space, can help you with introductions, relationships and advice. They can bring more to the deal than investment capital. They can bring Relationship Capital – that is what “smart money” is all about. Everyone can help you with general business questions. The real value comes from knowledge that may be specific and unique to your field. If you are in enterprise SaaS software, do not take money from a real-estate investor your cousin knows… it is not going to give you what you NEED.

4) If you need $2M to seed your company, and the investor wants to give $10M checks… you will frustrate each other. VCs have money they need to deploy – yet the work is the SAME for $2M check and $10M. The reverse if also true, if you need $10M, and you come to a small VC, the large check size will cause them to be extra worried. This will force them to breathe down your neck more, and be more sensitive to any bad news. Trust me, you will have bad news on this journey, everyone does. The point is to match the check size and the sweet-spot of the VC, as that is what you NEED.

These are standard considerations, and you should review them with your team.

The key though, the most important thing, is to realize that a VC is made of partners. The VC name means nothing – the partner means everything. You need to pick the partner that you can partner with.

That is not a simple matter, and you can’t do this in speed-dating style. As your match rate will be similar to speed-dating. Not good.

When you pick a partner in general in life (can be a VC partner, co-founder, employee, vendor, spouse…) – you should go through a process.

Picking the right partners for a long and hard journey is a big deal. It’s as important as your market size, product strategy, go-to-market plans and culture.

Consider these point to help with the partner selection process:
1) You want to meet them a few times, and not once. You would rather have three meetings, one hour each than one meeting that is three hours long. Its good to meet the partner when you DO NOT need money. Build the relationship, and show them traction over time. If you meet once, you present a dot on a graph. If you meet three times, every three months, they can plot a line…

2) You want to meet them in different scenarios. Usually, the meetings are only at the VC offices. Its not a neutral place. Try to suggest breakfast, lunch, dinner to get to know the partner. You will be spending years with this person, so its good to align BEFORE you sign the term-sheet. See point #1, meet them before you are raising, so you can build a relationship over time.

3) You want to verify that your vision and values are aligned. You may both agree that there is a big market, and that your product is amazing. Yet, you want to scale slow and make sure customers are happy – and the partner wants 400 employees in three years. Ask the questions now, before you take their money.

4) You want to partner with someone that you would pick to a lifeboat. This means that you want someone you think is capable mentally, professionally, intellectually. You do not have to have the same hobbies as the partner. But you DO have to see things from the same perspective, or you will frustrate each other. That will not give you a recipe for success.

5) You want to partner with someone you can tolerate, with ease. If you dread every call with this partner while you pitch them, its not a good sign. This is the dating period, and it should be amicable. After the investment, you will have a “honeymoon” period. But ultimately, the partner is here to make sure their investment is going to succeed. You should be excited to have the next meeting with the partner and be able to have an hour long conversation that seems to last five minutes. Only then you have found someone who will “get you”, your personality, your vision, and your values. Then you will have a real partner.

Finally, don’t think that the onus is only on you. The same rigor, has to be applied by the VC partner who will be on your board.

In this article, Wen H. Hsieh, General Partner at Kleiner Perkins shares a view that make this point crystal clear:

A seasoned venture capitalist once told me: “you can divorce your wife, but you can’t really divorce your portfolio company…so you better make sure you really like the startup and the founders before you invest!”