Identifying the Right New Investors
In the second post of our Series B sequence, we look at finding, evaluating, and recruiting new investors for your second round of funding. Since a Series B round is often somewhat different from a Series A, Senior Associate at Mission OG, Kevin Leonard, shares his seasoned input as we dive into this topic. Let’s begin by taking a microscopic look at the fundamental part an investor plays in this venture.
After family and friends pitch in to help you launch the business during seed rounds, a Series A round often follows. It’s not uncommon to develop a closer-than-average relationship with one or two key investors. These particular venture capitalists (VCs) will likely serve on your Board of Directors and offer sound (hopefully) industry advice.
Although your Series A round might include a handful of investors, there’s typically a lead investor who recruits other investors in their venture. Often, Series B rounds play out similarly. Remember, no matter who is on your Board, you (as the founder) still lead the company. Only now, you have years of experience and wisdom to glean from in your supportive team of investors.
Additionally, many investors doing double duty on your Board frequently function as the go-to folks if co-founder issues surface. According to insight from VC Fred Wilson in Inc., “The co-founder dysfunction impacts everyone in and around the company, but mostly the team underneath the founders.” He says that co-founder conflict is normal, but lead investors often lend a therapeutic hand to prevent “mom and dad” from fighting, per se.
That said, so long as the first round of funding was a positive experience, you’re likely an “old pro” at maintaining relationships and navigating other vital VC dynamics. However, it’s best to stay on your toes because now you’re going to be juggling old and new investor relationships — which is a whole new ball game. But before the juggling begins, how do you know whether a particular VC will be a good fit for you?
Once you’ve been a part of the VC world, you know it’s about more than merely the cash. Sure, a dynamite ROI is on every investor’s radar, and founders want to lock-in sufficient capital — but there’s more to the story than greenbacks.
Establishing secure founder/investor relationships is vital to the longevity of a VC-back company. Here’s what to look for when shopping around for a potential Series B investor.
Kevin Leonard of MissionOG describes industry insight as one of the most critical keys to pinpoint a good fit between investors and founders. In identifying prime portfolio companies, he goes on to say:
“We really want to target CEOs and teams that have a unique insight on the segment they’re disrupting and have built out a complementary team that balances the strengths and weaknesses of the group.”
Unsurprisingly, this requirement goes both ways. A Series B investor needs to be heavily involved and invested in your particular industry. They don’t necessarily need to be industry experts, but extensive industry knowledge must be at this level.
Paul Graham of Y Combinator shares his insight about funding, “Few startups get it quite right. Many are underfunded. A few are overfunded, which is like trying to start driving in third gear.” Combatting this common mishap requires founders to know more about venture capital investing, in general.
As a founder, it would benefit you to know how much of an investment you need — and how much each VC has to offer. It’s vital to review a potential investor’s history. Do they have a record with other companies? History often repeats itself, so how will a VC firm’s patterns fit with your company goals? Also, what kind of financial reserve does a potential investor have?
Although conducting funding rounds isn’t solely about the money, financial goals must align for a successful Series B. Keep in mind that not all VC firms are created equal. Do your due diligence, shop around, and recognize financial capacities. Lastly, be aware of the new methods of financing, as well.
The relationship founders forge with investors typically lasts a decade or more. As a result, it’s a smart move to partner with an investor who has extraordinary qualities. What’s more, traits of Series B investors are slightly different than those of Series A investors. If anything, they are more of a strategic partner as opposed to a supportive guide. That said, some of the most valuable personality traits to look for in a potential B investor include:
These qualities will help founders unveil the route from Series A to Series B and their IPO (if that’s the ultimate goal). Networking with investors and other founders is the most effective way to find folks with whom you want to conjoin and filter out those who won’t align with your mission.
If you recall your Series A strategy, “courting” potential investors was often the go-to plan to make meaningful connections. Networking at Series B isn’t unlike that plan. Industry conferences, meetups, and even pitch competitions give founders the chance to meet with investors face-to-face. Plus, you can connect with other successful founders to learn from them.
However, making connections is merely the beginning. Sure, you might be attracted to a particular VC firm, but are they interested in you?
Attracting investors means showcasing your fiscal responsibility, developing a compelling business story, and nurturing meaningful connections. When you schedule a meeting with an investor, remember that you can’t merely regurgitate your Series A pitch. Instead, you’ll need to exhibit your company’s historical performance, sales, customer growth, and future game plan.
Although there are new and innovative ways to raise capital nowadays, Series B funding most often comes from VC firms. What’s more, it’s not uncommon for the same investors who participated in your Series A to also invest in your Series B. Naturally, each funding round means a new valuation for your company — but Series A investors frequently want a piece of the Series B pie, per se.
That said, it’s not always the same players who want to invest. Sometimes, however, companies embarking on a Series B round attract VC firms interested in late-stage startups. As a result, founders often find themselves nurturing old and new relationships with investors.
According to Kevin Leonard, three elements show up in a lot of his conversation with potential portfolio companies, including:
These things tell investors a lot about your company, the opportunity, and how you’re thinking about growing the business. Keep these conversations in mind as you try to attract new investors.
Lastly, it’s not always that previous investors will continue on your journey with you for a Series B round. However, that doesn’t make those investors or firms any less vital to your company. Still, it’s no surprise that juggling new and old relationships is tricky.
For one, it isn’t effortless, knowing who to engage more and who to maintain a stable connection merely. What’s more important is trying to juggle the old and new demands with finesse — don’t leave anyone out.
Also, many founders assume that silence is a good thing. After a successful Series A, the relationship between founders and investors can go stale. Only the two parties feel differently about the relational drop-off.
For example, many investors wait for the founder to reach out for a more in-depth connection, while founders often take an investor’s quietness as satisfaction in their investment. Avoid falling into this trap as you navigate your Series B by communicating effectively with all your connections.
The next part of our Series B sequence features an in-depth look at operational and risk management changes as you embark on this new funding round. We examine company culture, professional roles, and some risk management strategies to consider.
With new products, team members, goals, and expectations, your daily operations are undoubtedly going to change. What should founders expect?
Typically, the Series B term sheet process is relatively straightforward — but it has its nuances, too. Here’s our guide to getting it right.
Series B shifts your business’s goals to a laser-focused vision of strategy. Your risk management approach must change to keep pace with your company’s new momentum.