Andrew Dudum is no stranger to building companies and fundraising. He is a cofounder and partner at Atomic, a venture fund in San Francisco that builds companies with the power to change the world. Atomic raised over $100M+ in 2016 across their portfolio, and its investors include Peter Thiel, founder of PayPal, and Marc Andreessen, who sits on the board of Facebook, eBay and Hewlett-Packard. Andrew is also a cofounder of Ever.com, one of the fastest growing photo companies in the last few years, and serves as an investor and advisor to more than a dozen other companies.
Despite his many responsibilities and busy schedule, Andrew was generous enough to sit down with me to discuss how founders should go about choosing a venture capital firm when fundraising.
Here are Andrew’s five tips for founders:
1. Set a timeline and stick to it.
“The sooner you get cash in the bank and get back to building your business the better,” says Andrew.
That’s because raising capital can be an endless process that can take anywhere from three to six months to a whole year. There are several steps between the beginning of your search for a VC firm and closing the deal, and Andrew says it’s not uncommon to have to take 40+ meetings to get the term sheet you want
Andrew insists that it’s important that you set a target timeline and do your best to hit it. Why? “Raising capital is incredibly distracting to your core business,” he says. “You are out of the office, away from the team and removed from your customers and product. In almost all situations, the sooner you close the round, the better.”
2. Know what you’re bad at.
Just as every employee is good a different things, every VC firm has different strengths and weaknesses. The key, according to Andrew, is to be aware of what your company is and is not good at so that you can select a firm that complements your company’s abilities in your next stage of growth.
“Your VC firm will be your critical advisor moving forward and can provide guidance and company-altering insight” he says. “Make sure you know your weaknesses so that you can find the partner and team that can complement your strengths in your next stage of growth.”
For example, are you looking to fill out an executive team? Do you want help ramping up an enterprise sales team? Are you struggling to reach the distribution partners necessary to scale? The good news is that a VC firm can help with all of those needs, but only if you select one with the right expertise. Don’t be afraid to simply ask what they believe their strengths to be, says Dudum.
3. Do your diligence and only target firms that are the right fit.
Fortunately, CEOs who are determined to complete the fundraising process in a timely manner have one powerful weapon in their arsenal and that is research.
“Raising venture funding is incredibly hard, but raising it from a VC firm that, at its core, does not invest in companies like yours in nearly impossible,” says Andrew. “So before you hit up your friends, ex-bosses and business school classmates to try and get intros to VC firms, you should do your research to make sure that the firms you’re targeting have already shown interest in companies like yours.”
Make sure you keep an eye out for indicators that the partner or firm can’t suit your needs.
[tweetthis]Make sure you keep an eye out for indicators that the partner or firm can’t suit your needs.[/tweetthis]
Do a quick search on Crunchbase or look at their portfolios to a.) identify the stage at which they generally invest, b.) the amount of money they typically invest in startups like yours and c.) the type of company and team that usually appeal to them. After all, “scrappy” early-stage two-man teams and startups with revenue of $10 million+ have very different needs. In most cases, only VCs that specialize in early-stage companies are equipped and willing to handle them, whereas other VCs that exclusively target more mature companies are well positioned to serve their growth needs.
“You’re trying to move fast, so you shouldn’t waste your time meeting with firms that aren’t interested in investing and won’t be well equipped to help your company grow anyway,” says Andrew.
Once you start the interview process, make sure you ask the right questions and keep an eye out for indicators that the partner or firm can’t suit your needs. For example, if moving forward quickly is important to you, pay attention to whether the firm is able to get back to you quickly with answers to your questions. If the firm’s response times are slow, end your talks with that firm nicely and continue on to the next one.
“Save the brain damage and focus on the VCs that you believe will really appreciate and add value to your company,” Andrew says.
4. Partner matters more than firm.
“Focusing on the firm is one of the biggest mistakes entrepreneurs make,” says Andrew. “First and foremost, raising capital is about finding the right partner, not the right firm.”
“The partner will be your primary contact at the firm. They will be in the trenches with you. It’s fundamental that you not only really enjoy spending time with that person, but that you trust, respect and have a great rapport,” he added.
It’s important you’re on the same page with your Partner and feel comfortable talking with them openly:
- Are you comfortable talking to them about tough stuff?
- Do you understand one another easily?
- Are you on the same page about what your future will look like?
- Can they help you be the best version of yourself and not hold you back?
- Will you still like them in seven or eight years?
- Could you imagine spending nine hours stuck at an airport with them?
“After all, when you decide to work with a VC partner, you’re signing up for a long-term relationship,” says Andrew. “Like all long-term relationships, instinct and values matter.”
5. Optimize for the size of the total pie, not for the size of the slice.
Too often, entrepreneurs focus on optimizing for “deal economics,” Dudum said, instead of optimizing for long-term equity value. They forget that this round of financing is likely not their last and focus only on short-term benefits.
What they should be thinking about is the long run. They should ask themselves how a particular VC firm and partner could help the company hit its next major milestone or fundraising event. Such questions will have a meaningful difference in the value of your company’s equity and ability to raise another round. Resist the temptation to optimize for a larger slice of a small pie.
“Find the team and partner that you believe will help you build the best, tastiest and biggest pie in the years to come,” says Andrew.