PS#039: My Playbook for Building Your VC Network (Part 3)
Today, we’re going to dive into your investor network.
It’s important to establish relationships across the investment lifecycle – from the earliest stages to potential exit opportunities.
If you’re looking to become a “full stack” investor, building these relationships and understanding their specific incentives will be a key part of your networking strategy.
To best illustrate how this works, we are going to assume that you’re working at a fund that primarily invests at the Series A stage. This will allow me to provide specific examples of how to provide value and best leverage these relationships.
Let’s get started.
Accelerators & incubators.
Investment stage: Preseed and/or idea stage
Accelerators and incubators are plays to find new ideas, founders, and businesses. These organizations are designed to help entrepreneurs take their business from an idea into reality. They often bring through a high volume of new startups and founders.
As a Series A investor, this is a great source of deal flow. You can meet entrepreneurs early in their journey, get to know them, and (hopefully) help them along the way. Even better, if you have an established relationship with those running the accelerator/incubator, you can get feedback on the founder/company’s development over time.
Cultivating these relationships can also help improve your “passes” on potential opportunities. If you’re focused on Series A stage, you’ll often get deal flow that is simply too early for your fund’s mandate. Instead of just passing on the round, you might be able to share accelerators or incubators that could be a better fit for the company’s stage. The accelerators/incubators will appreciate it as well, because they are always looking for new startups to join their programs.
Early-stage investors.
Investment stage: Preseed, Seed, Series A-B
Historically, early stage investors predominantly play in the Seed – Series B range. However, as more capital has flown into the industry, all investors are seemingly moving further and further down market, which in this case can even include preseed investments.
As a Series A investor, this relationship can (again) provide a great source of deal flow. Even better, these investors can be potential co-investors in your investments. These two elements make these very important relationships in your network. You’ll want to keep these investors close so that you stay “top of mind” for any deals that cross their desk.
In the same way accelerators and incubators can be useful for companies that are too early, so can other early-stage investors (but even more so). Some of these investors may be willing to invest a bit earlier, some may have a wider mandate or other theses that fit the company in question, and some may just prefer a certain type of deal. Whatever the case may be, having an extensive investor relationship in this range can make your “passes” useful for founders.
Plus, these investors will appreciate the deal flow, introductions, market intelligence, co-investing, etc. Another way to build a strong reputation in the market.
Late stage investors.
Investment stage: Series B-D+ (includes growth investments)
Late stage investors are looking for companies that have clear product-market fit and are looking to accelerate their growth to the next level. This stage of the market has been on a wild ride over the past few years. During the pandemic (and prior), late stage investors were pouring investments into venture capital startups. As of late, this market appears to have died out with a much smaller amount of deals being completed.
In either case, as a Series A investor, this stage of investor (again) provides a great source of deal flow. They are often looking for more mature companies and will pass on startups that are too early for their investment criteria. While early for them, they can be great opportunities for your fund.
These investors are also potential future investors for your portfolio companies. In this case, building these trusted relationships will allow you to make key introductions for startups in your portfolio (or other startups in the market).
Furthermore, if you’ve maintained a strong relationship, you’ll have a good sense of their investment criteria and required milestones. If you have enough of these relationships, you’ll understand what your investments will need to do in order to raise future funding.
It’s a win-win. There’s an opportunity to share trusted deal flow and market intelligence that helps investors on both sides of the table.
Strategic acquirers & private equity firms.
Investment stage: Growth investments & acquisitions
Strategic acquirers (corporations) and private equity firms are the most common exit path for VC-backed startups. While everyone talks about IPOs, this is usually where investors & startups find liquidity. Typically, strategic acquirers are willing to pay a higher premium as they will (theoretically) be gaining some form of synergistic value in acquiring the startup. On the other hand, private equity investors tend to be more financially disciplined/focused.
As a Series A investor (or really any venture investor), these are really important relationships. They will provide market intelligence on acquisition targets, valuations, comparable deal criteria, etc. This information is critical as you build out your returns analysis. While databases are great, the information isn’t always 100% accurate. To support this data, it’s important to be speaking with the actual acquirers regularly to see how they are valuing businesses (both currently and historically).
At the end of the day, paper gains don’t mean anything. You need to eventually exit your investments and achieve liquidity. If you have trusted relationships with these buyers, you can help your startups achieve that potentially successful exit.
On the other hand, for acquirers, the deal flow/market intelligence provided can help inform their strategy and even lead to potential acquisitions.
Investment banks.
Investment stage: Growth investments & acquisitions
Investment banks (especially boutique banks) can be used to advise on acquisition processes or growth-stage capital investments. In some cases, they’ll even run venture capital processes. Due to their vantage point in the market, they can help make sure a startup is receiving the best terms for the transaction.
As a Series A investor (or really any venture investor), they can also be an excellent source of market intelligence. Just like your relationships with the acquirers mentioned above, investment banks can provide information on valuations, multiples, acquisition targets, active acquirers, etc. They often have a lot of historical information in these areas (because it’s their job to know).
To that end, you’re able to provide additional market intelligence for them as well as introductions to companies (from within and outside of your portfolio) that could use their services.
Again, understanding the exit potential of a business is the name of the game in venture capital.
Bonus: investor cheat sheet.
Whenever I enter a new space, I take this cheat sheet (below) and start building out my network. I go through the process I outlined in the previous issue and figure the best path to providing value.
Use this to start building your own relationship database of investors across the capital stack.
Next week, we’ll cover the specifics behind building out your ecosystem network.
