This is my third time joining a new firm and second time starting one of my own. One would think that I would remember the challenges of building up a new firm, like a type of muscle memory, but I always forget how hard it is to stay relevant and have a seat at the table for top-tier deal flow.
2017 could be characterized as the “Year of the new VC,” with an unprecedented number of new managers. According to a mid-year report by Fenwick & West, 2017 is on pace to see the highest number of first-time venture capital funds formed in more than a decade.
And based on a PitchBook-NVCA Venture Monitor report, first-time funds and micro funds are seeing a lot of success: as of 3Q 2017, $2.4 billion had been raised across 25 first-time funds.
TechCrunch sums up the resulting challenge well: “The large number of new venture capital funds may hint at broader structural changes in the startup ecosystem, but for the young and eager partners at the helm of many of these funds, all the rush of money means is more competition.”
Arguably, it has never been better for an entrepreneur with the abundance of capital sourcing options, but for fund managers, how do we differentiate ourselves and win the best deals?
There are a few ways to answer this question, but one of the key points for us was to develop a reputation in the local startup community for approachability and helpfulness and try to maintain that same relationship with co-investors.
Two of our recent deals came from these early built relationships. Eva, my co-founder, mentored an amazing engineer at one of her prior companies who ended up starting a new company, which we were fortunate to participate in. The second deal came after our entire team spent six months with a MBA student exploring two different ideas before he picked the right one. Both deals got competitive toward the end, but the early bedrock we laid and the value we demonstrated ultimately gave us the edge.
While relationships with founders are helpful, relationships with co-investors can be even more so. Close to 50 percent of Fika’s deal flow comes from other investors. Many of us take for granted that other investors will remember you simply because you have co-invested with them in the past. The truth is that if you’re not on their immediate radar (i.e. one of the top three funds on their call list), they tend to forget about you.
We drafted a contact list of our favorite co-investors (VCs and individuals) and ensured that one of us keeps in touch with them on a monthly basis. Quick text messages or monthly calls are a great touch point, but you need to hold your own and show that you can provide reciprocal value to them, as well. This could take the form of sharing proprietary deal flow in return or helping their portfolio companies.
Another critical component is to actually be differentiated from your potential competitors in the market.
We are an enterprise software-focused seed fund based out of Los Angeles. Sound differentiated enough? Not quite.
To rise above the crowd, you need to go deep on one of two dimensions — either functional (operations, marketing, etc.) or sub-sector industry expertise (supply chain software, fintech infrastructure, etc.). I was recently reminded by Jeremy Schneider, director of WIN Funding, that this requires consistent effort, whether it is fostering relationships with senior executives within a certain industry or blocking off time every day to get smart on a certain topic. I’m thankful that this push has helped two of our team members develop deeper competencies — Arteen in real estate tech and Matt in sales leadership. Our plan is to have the Fika team continue to develop these deeper capabilities over time.
In my early days as a VC, I admittedly relied on investment signals and diligence of other “top seed funds,” which sometimes led to sub-par decisions. I’ve also come to appreciate that the best and most coveted entrepreneurs respect investors who put in the work, run a thoughtful diligence process and are willing to stick to their convictions and swim against the tide. I have been pleasantly surprised that despite being a new fund, we have managed to win deals, as entrepreneurs were impressed that we offer unique perspectives, an expedient diligence process and decisions that are not based on popular sentiment or market trends.
We’ve also used some creative strategies to make sure we have a seat at the table.
When limited partners evaluate first-time fund managers, they are less concerned about ownership and care more about access to the best deals.
Having been investors for a while, we are now more focused on ownership these days, but at our prior funds, we learned that being slightly flexible with your check size/ownership targets allows you to access more deals and presents an opportunity for you to build relationships with other great co-investors. We still make these exceptions, but with the caveat that we will work hard the moment we get in to demonstrate immediate value with the goal of increasing our ownership down the road.
The “get in while you can and buy up” strategy works, but I shall let you in on an interesting strategy that we’ve used a couple of times at Fika: the conflict an entrepreneur often has is whether to take a term sheet from a new investor and risk not having enough room in the round for a more established brand.
When we sense that this is the case, we have added an interesting clause in our term sheet, where an entrepreneur is allowed to “shop” for a better deal within a certain time frame, but should she choose to, Fika would have the right but not the obligation to invest a certain amount. This is one of many ways we get creative and remain as entrepreneur-friendly as possible as it helps further build our reputation.