Raising money from a large venture capital firm is a lot like banking with a large, commercial bank. You’ll have access to capital, resources, and the credibility that comes along with banking with an established entity, but you probably won’t have the tailored advice and around the clock support that comes with banking at a local community bank.
When it comes to who you should target for your capital raise, most people will tell you to go for the large venture firms because of the publicity, resources, and network. Having these funds on your cap table can make it easier to raise additional capital as it signals to other venture firms that you are a credible company. While there is a certain gravitas that comes with raising money from a large venture firm, depending on your startup needs and your personality as a founder, you may be better off raising money from smaller venture firms.
Smaller venture firms may have deeper connections in a particular space that you’re trying to join, work with companies in similar industries, or have access to networks of potential employees. Of course, this is not to say that the larger venture firms won’t provide you with these same connections, but if you’re trying to break into a particular industry, you want to position yourself with those that have studied the industry, worked with companies in the sector, and understand the unique challenges that you will face as a founder.
After all, venture capitalists can offer more than just their capital – you should consider their expertise, their network, and their ability to advise you. When choosing a venture firm to be your lead investor, don’t be afraid to ask them about their portfolio companies, market thesis, and their access to networks within a specific industry. Remember, the venture firms are doing diligence on you, so you should do your own due diligence on firms as well — don’t assume just because of their name recognition, that they have the resources and network that is most beneficial for you and your startup.
If you’re the type of founder that would prefer more “hands on” attention from your investors, you’re more likely to experience that with a smaller venture firm. As a founder, the advice you receive from your venture capital partners is invaluable to your success and is one of the most important relationships that you will develop throughout the life cycle of your company. Especially if you’re a first time founder, you may find that a smaller venture firm is a better fit for you than a larger venture firm.
Although you may dream of being able to call up the general partner at a large venture firm for advice, in reality, you’re likely to have a junior partner attending your board meetings and available for advice. Therefore, having a large venture firm on your cap table does not necessarily mean that you will have access to the general partner of that firm. You should understand who from the venture firm you will work most closely with and ensure that they are a perfect personality fit.
Working with large venture firms can be costly in terms of dilution. Large venture firms are more likely to require 20-25% of your company post-financing as well as the full round, which won’t leave you space for existing investors, angels, or other firms. This is because they want to ensure a set rate of return for their firms and many firms have specific mandates as to what percentage ownership the firms should have depending on the round.
Although large venture firms are more likely to write you a larger check, you’re more likely to have to give up some control in the form of a board seat. If you’re an early stage company and you’re not wanting to add a board seat, you may have more luck with the smaller venture firms who are less likely to require it.
Who you raise money from is as important as how much money you raise. Your investors should be those that offer you the advice, network, and resources that you need to be successful. Raising venture capital is hard and any amount raised is an accomplishment – if you’ve successfully raised money, congrats! If you’re looking to raise capital, understanding the differences between a large venture firm and a smaller venture firm can help you be more strategic in targeting your next lead investor.