Venture Capital – Investment Group

When you seek venture capital, depending on the size of the round and the appetite for risk of the investor, you may end up with an investment group rather than a single VC.

During the course of your talks with various VC firms, ask if they would consider being part of an investor group. The conversation that follows will give you a variety of information. They will probably tell you if they always, sometimes or never co-invest with other groups. If they do, ask them who else they normally invest with. If they are interested enough to have you in for a presentation, they may be willing to make an introduction to another firm.

Also, let’s say you get a ‘no’ from the VC you are talking to, but you get the feeling it’s a soft no. If you find another company that is willing to lead your round of financing, you may come back to firms that normally co-invest with others, even if they have already turned you down. Upon occasion, once an investment is blessed by another firm, the first firm may reconsider their position.

The VC should have let you know ahead of time that his firm is interested in being part of an investor group. Finding out on the term sheet that the firm only intends to invest in part of the round indicates either that the VC is a rookie or that there were some last minute qualms about the investment that caused the partners to back-peddle at the last minute.

A rookie VC may or may not be a bad thing, but if one or more of the partners is skiddish about the deal, there could be trouble through the term-sheet negotiations. Try to pinpoint what is making the partners take a lower risk position, so you can reassure them.

In general, having several well-known firms as part of your investor group is a positive. For one, you get twice the resources for the same investment, including twice the industry and future investment contacts. Additionally, if you need a second round, the investors may not be able to continue investing, but if you have two firms, your chances of receiving additional investment double.