Entrepreneurs should take a close look at a venture capital firm’s fund size when they’re looking to raise a Series A Round. Professor Ilya Strebulaev shares four areas to research:
1. Number of Partners
Typically the VC who leads your Series A round will take a board seat at your company. How many companies do they have in their portfolio? Which partner do you want on your board? How many boards do they sit on? How much time will your company get with the VC?
Early stage deals are much smaller, so VC funds are smaller. In 2004-2005, the median-sized Series A round was $1 million. Now we’re seeing $2.5 million Series A rounds because of angel investors and incubators/accelerators. Does the VC specialize in a specific stage of a company’s development? What is the deal size of their recent investments?
Given the high risk of each new investment, VCs are looking to invest in a number of companies across several years in a typical 10-year fund lifecycle. What other companies are in their portfolio? How old is the fund – is the VC in the early (1-2 years), mid (3-4 years) or late stage (5-6 years) of the fund? What’s your company timeline? Where will your company be in year 10?
4. Prior Returns
VCs start their future fund-raising efforts during the late stage of their existing fund. It’s critical for VCs to show profit from their current fund to raise a new fund. Both past performance and reputation help VCs raise larger funds, which is why you see a well-known VC firm like Kleiner Perkins closing bigger early stage funds. There’s empirical evidence that success begets success:
-More successful funds are more likely to raise more funds
-More successful funds are likely to raise larger funds
-More successful funds are likely to charge higher carry interest
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For more, read “Venture Capital: A Business of Failing”: http://stnfd.biz/pMB8o