Know Thy VC: the Fundraising VC
July 2nd, 2007 by Benjamin KuoEntrepreneurs tell me they are often mystified by venture capitalists who seem to understand, and have enthusiasm for their companies, will highly recommend the firms to other venture capitalists, but seem to be taking forever to fund their deals. In many cases, I’ve found it’s not because of any lack of interest or fault of the companies, but because they’ve been talking with a venture capitalist that doesn’t actually have any capital to deploy.
It’s a natural part of the VC cycle; venture capital firms raise money for a fund from their limited partners, spend some amount of time disbursing those funds to various companies in their portfolio, and, when they are close to the end or at the end of their fund life will go back to their LPs for more investment money. If those funds have done well and made a decent (or hopefully, spectacular) return for their LPs, they will raise another fund and go through another VC cycle.
What does that mean for entrepreneurs? It means that as an entrepeneur you should do your due diligence and ask the VC you are working with, or find out through other sources, if a specific venture capitalist has dollars to spend or if they’re in the midst of fundraising. Right now, it’s turning out to be particularly important as some of the more active funds here in Southern California have finished investments out of their current fund, and are in the midst of fundraising. A number of funds who would be natural candidates for approaching about an investment, just don’t have the dollars to invest in new companies, no matter how good of an opportunity it is and how good of a match it is to their profile. It’s no fault of the entrepreneur or company looking for funding, it’s just that (obviously) a venture capitalist isn’t going to fund a company if they can’t see the investment to completion. And, as an entrepreneur, you wouldn’t want to take an investment from a firm which doesn’t have additional “ammunition” in the form of follow on investments set-asides in their fund.
I recall hearing about at least three companies in the past year or two who have gone under, because they were Series A investment companies who were funded by VCs who hadn’t reserved additional capital in their fund for additional investments. Essentially, these companies were “orphaned” due to their major capital provider exhausting their store of venture capital. That’s not a good situation.
So, know thy VC, and figure out where the venture capitalist you are about to take money from is in their fundraising cycle!
