Many new companies rely on venture capital (VC) in order to grow. To get a better feel about successful VC fundraising, I talked with Valery Komissarova, Principal at Grishin Robotics. Grishin Robotics is a $100 million venture-capital fund that focuses on smart hardware, robotics and the Internet of Things (IoT).
Wong: What are the three top issues that most developers forget to consider when coming to a VC?
Komissarova: First, venture capital is an asset class with fairly specific requirements in terms of the kinds of deals we are looking for. Hence, to ensure a good match, entrepreneurs should be keenly aware of the motivations, mechanics, and mathematics of the decision-making processes of venture-capital firms, as well as various parties inside of them. Specifically, VC firms’ managers are looking for so-called “outsized” returns on their investments—and 2X to 3X on the original investment simply doesn’t cut it. Does your business, realistically, have the potential to generate those kinds of returns?
Although countless factors are involved—and the level of uncertainty in this business is notoriously high—the size of the market is one of the utmost things to consider, as well as your exit scenarios (in an ideal world, an IPO; the more likely reality, though, is acquisition by a bigger company).
Valery Komissarova, Principal, Grishin Robotics
VC investors make a distinction between VC-backable companies and lifestyle businesses. The latter may be a great outcome for you as an entrepreneur in terms of income and such, but highly unlikely to generate meaningful returns for us. There’s nothing inherently bad about it, but it does highlight the fact that VC fundraising is not a default route to grow your business. Rather, it must be a result of careful consideration to avoid misalignment of interests later down the road.
Second, get very specific regarding what VCs are looking for, not just on a high level. How are deals usually structured? Get comfortable with key terms (e.g., liquidation preference or pre-money valuation), for instance, read books by Brad Feld. What is the style and format of the pitches VCs are used to? How should your investment deck look? Is it okay to write a cold email to a prospective investor, or does someone need to find an introduction first?