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How to Evaluate Investors for a Seed VC Syndicate
When raising a round of seed venture capital, founders often focus the bulk of their time and energy on securing meetings and nailing their pitches — and rightfully so. It’s absolutely critical to secure that first interested party in order to more easily convince other investors to join and complete your round of funding. But what about that latter part? What happens when you actually do succeed in generating interest, and now the task is to round out the fundraise with multiple firms on board? The process wherein a VC syndicate crystallizes to close a seed-stage investment can be complex and unclear from the outside, yet it represents a vital step in the process for founders.
Below, I aim to shed light on the decision-making process to help entrepreneurs better evaluate firms for a seed VC syndicate.
Before we begin, it’s important to acknowledge that there are actually two common and distinct strategies for raising a seed round of capital:
1. Subscription approach – An entrepreneur sets a structure (usually a convertible note) and recruits individual angel investors who subscribe to the round, all without a term-driving lead investor.
2. Term-driving investor approach – An entrepreneur finds a lead institutional investor (or quasi-institutional) to price and set the structure and dynamics of the round, working together to bring in additional syndicate partners. These syndicate partners might be other seed-stage funds, individual angels, or both.
(As a quick aside, the subscription approach might also include venture capital firms, but this is typically for very “hot” companies or in a competitive environment, like at a Y Combinator Demo Day. )
Deciding between the above two options is a post for another day, but when entrepreneurs select the latter route, and multiple VCs invest together, founders are then faced with the daunting task of navigating the murky waters of all the various firms who are active seed-stage investors — and many more who at least market themselves as such despite their sweet spot lying somewhere in later rounds. And while we’ve seen an increasing amount of information and transparency about the players in this market, it can be challenging to embark on a set of initial meetings with investors without an understanding of how these VC syndicates are formed.
Factors to Consider for a VC Syndicate
Every firm, whether it follows a dedicated seed venture strategy, a full life-cycle approach, or somewhere in between, has a set of qualities that affect how they would fit into a seed venture round syndicate.
(Editor’s note: We hope you find this post useful regardless of whether you interact with NextView Ventures. However, since we often receive questions about our approach to each of these factors, NextView-specific information has been added after each.)
Some firms have a typical seed check size which is their standard bite size (as low as five-figures as high as seven). Others are check size agnostic and therefore very flexible because it’s just about the option on the following round. Still others have different decision-making processes for different check sizes within a seed round. Unfortunately, this figure is rarely if ever on a firm’s website and must be asked during the first meeting.
[At NextView: Check size varies but generally falls between $250K and $1M per investment.]
Willingness to Lead
This leadership dynamic is important especially when talking with seed-only funds, as many firms have an explicit strategy of only participating in a round coming together with a third-party lead syndicate VC partner. I’ve seen many entrepreneurs find themselves with numerous parties “interested to follow” but without a firm willing to catalyze the process. There is some correlation here, though not complete alignment, to check size (i.e. larger check writers have a greater tendency to lead rounds).
[At NextView: We have a bias, but not a requirement, towards leading a round, and we always syndicate with other institutional and individual investors. Since we are a seed-focused firm, the only time NextView leads is during a seed round, though we reserve follow-on capital for our existing portfolio company’s future rounds of financing.]
Level of Lead Investor’s Involvement Post-Financing
Venture firms approach involvement after a seed round wildly differently. For larger, full life-cycle firms which also make a number of early-stage investments, partner involvement can be little to none at the seed stage. Yet for some of these firms, the partner may be more hands on if the startup “counts” as a full investment within their partnership dynamics. It all depends on a specific firm’s approach. Similarly, even for dedicated seed-stage VCs, partner involvement can vary depending on a firm’s strategy. In both cases, the amount of time spent is generally inversely proportional to the number of new seed investments the firm does a whole each year.
[At NextVew: Each partner makes just a handful of investments per year where there’s high conviction and alignment with founders, as we believe in being hands-on and offering support during the first few formative years of a company’s growth.]
Board Seat Requirements
Partner involvement after seed financing can, but doesn’t always, require codification with a board seat. The board seat dance at the seed stage can be a challenge on either direction: Occasionally. no firms want to designate someone’s time for the role, while other times, more than one investor may be looking for an official board role despite not being a fit at this stage. This dynamic typically unfolds based on how involved a partner plans to be with a given company (i.e. more time spent translates into more desire for board seat), but some firms are satisfied with “in-between” measures like official board observer status and defined information rights.
[At NextView: We typically like to take a board seat or board observer role during the first 18-24 months, when we feel we can have the greatest impact and provide the most guidance.]
Additional Systematic Value-Add After Investment
Some VCs can add an additional set of benefits. For instance, corporate strategic investors often offer unique support for operating businesses, while firms with large portfolios may have network effects among its companies, partners, and staff. Additionally, some larger VCs might offer a range of “full-service” support options, including PR, recruiting, and other functions.
There are many ways that venture firms can help their portfolio CEOs during the seed-stage in lieu of — or in addition to — partner involvement, all of which can be a real plus but may not be immediately obvious to founders during the fundraise process.
[At NextView: We aim to add additional value through a suite of educational and business development initiatives for both the portfolio and greater startup community, check out our platform resources here]
It’s always easiest for a VC to make an investment in his or her own backyard, especially at the seed stage where partner involvement is so critical. Geography thus becomes a more acute issue. So as a general rule, seed-stage firms have a greater tendency than larger firms to follow a strategy which focuses on a particular city or region. Of all the attributes in this list, geographic preference is perhaps the easiest for founders to discern just from looking at a portfolio company list on a VC’s site. But actions speak louder than words – sometimes VC firms would like to market geographic focus or agnosticism, but in practice it deviates. No matter what a VC says, the proverbial bar is higher in making an investment outside their typical geography, however that’s defined.
[At NextView: We invest solely in US-headquartered companies, with about 80% of that activity happening between Boston and New York.]
Sector Focus (or Lack Thereof)
Like geography, sector focus can be more readily gleaned from a portfolio company list than from a firm’s marketing, as the two sometimes differ. After all, where a firm has been and where it wants to go can be two different things. Some funds promote themselves as completely focusing on a particular space, while others take a broader approach. It’s important for the partner and firm to have some background in the area of a new investment, but extremely heavy investor concentration in a particular space can have risks in addition to rewards for an entrepreneur.
[At NextView: Our focus tends to come from other factors such as stage of growth and geography and, as a result, we invest across a number of sectors, from B2B SaaS to consumer apps to platform companies to deeper technical plays like ad tech infrastructure and much more. This is best seen on our site under “Investments.”]
Many people have covered this topic in the blogosphere about the perils of venture firms’ signaling in follow-on financing subsequent to seed rounds. (For those unfamiliar, the quick summary: If a later-stage VC invests in your seed round but declines future rounds, that signals to other investors that something might be amiss, making later rounds harder to raise.) It’s not worth rehashing the dialogue in full here, other than to say that signaling issue of larger life-cycle VCs is real. Period. We’ve seen it directly in our portfolio companies raising successive rounds.
That being said, there are indeed clear benefits to having deep pockets at the table immediately from the seed round. I think that the most important aspect of this issue is for a venture firm to state a clear follow-on approach and be consistent in implementing it. The most trouble comes when a player’s intentions are unknown (or undefined) or inconsistently applied so that there are surprises in the subsequent follow-on process.
[At NextView: Since we don’t lead later rounds and won’t invest for the first time unless it’s seed-stage, potential signaling issues are nonexistent. And again, we do reserve follow-on capital for our existing portfolio company’s future rounds of financing led by other investors.]
Conflicts of Interest in Existing Portfolio
Especially given that some seed-only funds follow a rapid deployment strategy in making dozens of investments annually, competitive conflicts of new investments and even existing investments with others in a portfolio can be a real factor. Some firms are lax about these conflicts (which indeed are sometimes inevitable when startups pivot), while others are very strict about not having more than one company in a general space. But I have observed VC firms intentionally invest in competitive offerings.
[At NextView: We won’t make a new investment in a startup which, at the time of that investment, would be competitive with one of our existing portfolio companies.]
Prestige of a Firm or Investor
Nobody explicitly talks about it because it’s implied: prestige matters. It matters in a lot of things, from recruiting all the way to attracting that next round of financing. On the margin, higher-prestige seed investors attract higher quality Series A investors.
[At NextView: We strive to earn the respect of entrepreneurs and co-investors with whom we work every day to build great companies.]
Institutional LPs and Standard VC Fund Structure
Why a VC’s fund structure matters to an entrepreneur isn’t immediately obvious: It’s about consistency of behavior. For example, the more traditional, “plain vanilla” the structure, the more the investors are going to be motivated based on financial gains on a consistent basis. That’s not to say that these traditional VCs are going to behave badly, just that any and all behavior and expectations from your investors should be consistent so at least you know the driving force motivating their actions.
Less formalized sources or non-traditional structures of capital, on the other hand, can sometimes exhibit more erratic, non-financially motivated behavior. Thus, when a syndicate forms, understanding structural bounds and consistency in investor actions is key for each member of the partnership to avoid surprises down the road.
[At NextView: This is best explained by visiting our site and clicking “Approach” to view our investment model and more info on our partnership dynamics.]
Last but certainly not least is the answer to an extremely important question: Do you as the entrepreneur want to work with both the person and partnership on the other side of the table? Are you merely holding your nose because the money is green or do you truly want to work alongside this person for the months and years to come?
[At NextView: We’re solely focused on seed and go to painstaking lengths to invest in a small number of companies in order to be hands-on partners. We therefore believe this is one of or even the most important factor to consider when a founder evaluates other firms to syndicate a round.]
Building an Optimal Seed VC Syndicate
Putting together a seed VC syndicate of one or more firms is like fitting together many puzzle pieces. There are different “right” attributes for a startup’s round depending on the situation, and even then, those characteristics can be assembled by selecting one firm which most closely matches or by aggregating a series of participants which bring a couple of those attributes to the table.
The key in building the optimal seed VC syndicate is to figure out what qualities should be present and then construct a scenario which includes them with one or more partners. Without doing easy homework and asking the right questions up front, entrepreneurs can miss out on including valuable investors in the round -or- add too many non-valuable or “redundant” constituents which just complicate the composition and communication going forward.
At times, larger life-cycle VCs aren’t as consistent in their approach to the above list because the exact parameters of a seed investment aren’t clearly defined internally. It’s not their main focus or even a major priority in some cases. Dedicated seed firms, on the other hand, often have a fairly set and consistent answer to most of these questions, as participating in seed rounds is their bread and butter. Yet even then, it’s not ever black and white or wholly consistent. My hope is that this list helps you navigate this increasingly complex process.
This post originally appeared on NextView co-founder and partner David Beisel’s blog, Genuine VC. This is an updated version.