Yesterday I had the opportunity to interview Brad Feld, who is considered among the elite investors in privately held companies.
For those of you who are not familiar with Brad, his background includes starting and selling his own software company, investing as an angel in 40 to 50 companies, and founding or co-founding three venture capital firms: Intensity Ventures, Mobius Venture Capital and Foundry Group, where he currently serves as Managing Director.
While there were several invaluable points for entrepreneurs seeking capital in the interview, I found the following to be most interesting:
1. Your VC firm is your partner.
Many first-time entrepreneurs view VCs simply as providers of capital. In actuality, VCs are partners. They exert control over your company. They have experience in product development or scaling companies, or both, and can provide significant value beyond the money they infuse in companies.
Because VCs are partners that exert control, you need to assess them much like you would other partners. Mainly, you need to make sure that there is a really good fit.
2. Angel investors are the friend of the first-time entrepreneur.
First time entrepreneurs should strongly consider angel investments prior to venture capital. Angel investors often have financing experience which can help entrepreneurs navigate the VC waters when they are ready (there are a ton of terms and issues involved with venture capital that most first-time entrepreneurs don't know about).
Angel investors also tend to have relationships with VCs. Also, angels often have the operational experience to help grow the entrepreneur's company. And finally, the angels' funding can help the company grow to a point where it is more suitable for venture capital.
However, when structuring angel deals, it is imperative to keep the pricing/valuation fair and the deal terms as simple as possible. If not, raising subsequent venture capital rounds becomes more challenging.
3. Don't look for investors who are not a good fit
Brad mentioned the 80/20 or even the 99/1 rule. Essentially, entrepreneurs should spend a ton of time on the 1% of investors who are a great fit. And not waste their effort on the other investors.
Two key aspects that Brad mentioned for ensuring a good fit are 1) geography (many VCs will only invest in certain geographic regions) and 2) sector (Foundry Group simply doesn't invest in Clean Tech; no matter how exciting the company looks). I would also add "stage" to this list as many VCs focus on companies at specific stages (e.g., some only want post-revenue companies, etc.)
You can listen to the full 30-minute interview by clicking the blue triangle on the audio player below: