In a recent blog post, angel investor Chris Dixon posed the question of whether VC “brands” mattered any longer. He provided the context of a hypothetical entrepreneur who was in the enviable position of being able to choose between multiple term sheets from venture firms.
Mr. Dixon’s piece was a good one. Dixon’s principal points were that (1) brand matters only with the most august “ivy league” firms whose names alone can increase the probability of follow-on rounds due to the number of later stage investors that base their entire investment strategy on backing companies funded by the top decile funds; and, (2) having a well-regarded venture investor can help in recruiting talent.
I do not dispute Dixon’s points, but would add extra color. Dixon’s use of the phrase “enviable position” is relevant given the environment we are in. So many entrepreneurs strive fruitlessly for one term sheet, let alone dare to hope to receive multiple term sheets. Discussions around comparing venture firms, therefore, smacks a little bit of a “nice problem to have” for most entrepreneurs braving the current fundraising waters. Indulging in comparisons on the relative merits of different venture funds when so many entrepreneurs are just trying to keep their companies afloat is a bit of a luxury that few feel they can afford.
Brand still matters, but should be one factor among many. As such, if an entrepreneur is going to engage in this debate, I think there a few other questions that also require exploration. During the dot-com era, some believed that the weight of a top fund’s reputation could carry a questionable company through multiple rounds of financing. There appeared to be a juggernaut effect in evidence in a lot of deals - so many established firms were investors that a belief emerged that with all the reputations at stake there was no way that those companies would ever be allowed to fail. A colleague called this the Ovitz effect, in honor of former Hollywood superagent Mike Ovitz. The origin of this was that Mr. Ovitz was known for stacking his projects with so many big name Hollywood players that the perception emerged that the movie just had to be a blockbuster, lest big reputations be tarnished.
Evidenced by all the failed companies of the past decade backed by prestigious and lesser-known firms alike, this belief has now be soundly discredited. Even the most prestigious venture firm is unlikely to save a company that is doomed to fail.
1. Partner Quality. As Dixon states, there are good partners and toxic partners at all manner of firms, new or well-established. As such, the brand issue is now almost secondary to the matter of partner quality. Who at that firm is going to be on your board and championing the investment within the partnership? Does that partner have a reputation for rolling up his or her proverbial sleeves and adding value to company management or will that partner be tapping away on the Blackberry at board meetings and contributing little to key discussions and decisions?
2. Gauging a firm’s longevity is Critical. When weighing brand it is just as important to weigh internal factors at the firm that are not readily obvious. For this reason doing reference checks on prospective investors is critical. Where is the firm in its fund cycle? Does it have fresh capital from a recently raised fund, or is it at the end of its fund life? How likely will it be able to participate in a follow-on financing? [This is not insignificant. Broken syndicates and hung tranches are a real problem right now.] If it is almost fully committed on its current fund, how likely will it be able to raise another fund?
3. Ecosystem should be weighed. Finally, it’s helpful to evaluate your company and where it is in its lifecycle with the firm that has tendered the term sheet. Has that firm made many investments in your space, or is your deal one of its first? A venture firm well-established in a sector will likely have a deeper rolodex of contacts and more domain experience from which to draw from. The earlier stage the deal, typically, the more important this is. Speed bumps lurk everywhere. Having a partner on your board that has experienced them with other companies in your space can be a big advantage, regardless of brand.