How VCs Handle Portfolio Companies During the Tough Times
2023 is off to a rough start in terms of fundraising and VC.
Many rounds will not get done or will get done with very different kind of terms.
HOW DO VCs HANDLE PORTFOLIO COMPANIES WHEN TIMES ARE TOUGH?
What kind of support can founders expect from VCs that backed them?
1. VCs ALWAYS PRIORITIES EXISTING INVESTMENTS, ESPECIALLY IN BAD TIMES
Once a VC invests in a business they are highly incentivized for it to succeed.
WHY?
Typically VCs make few bets, so the bets they make they want to work out, so they make money!
2. TYPE OF VC SUPPORT VARIES
Bad times or not, VCs range from VERY HANDS ON to VERY HANDS OFF.
From hiring to partnerships to board management - different VCs may or may not help with different aspects of the business.
BUT, FUNDRAISING IS SPECIAL!
3. FUNDRAISING SUPPORT IS SPECIAL FOR ALL VCs
VCs are concerned about a company's runway.
WHY?
Because if the company runs out of money the VC will get a 0.
Most of the time VCs want the company once it gets more money.
This DOESN'T MEAN they will do EVERYTHING HUMANLY possible to help achieve this.
4. VCs BUCKET COMPANIES INTO CATEGORIES
Venture MATH is such that BIG WINNERS drive MOST of the DOLLARS.
This POWER LAW forces VCs to bucket companies into likely outcomes.
Most VCs spend most of their time with perceived winners.
Even BEFORE the raise, the VC already knows how they FEEL about the company, i.e.
EXCEPTIONAL
GREAT
GOOD
BAD
FAILING
What they do during the raise will likely match how they feel about the potential outcome.
Lets break it down.
5. THE VC THINKS THIS IS A BREAKOUT / FUND RETURNING COMPANY
If the VC is exceptionally bullish on the business, and their fund size permits it, they will likely write another check themselves.
This is NOT typical and is COMPLICATED because of Partnership and LP dynamics.
The problem is IF the VC just writes another check their Partners & LPs may QUESTION THEIR REASONS.
Are they just bailing the founder out to make themselves look good?
For this reason most VCs want a NEW EXTERNAL LEAD.
6. THE VC IS VERY SUPPORTIVE / WILL PUT IN MORE MONEY IF ...
More typically, a supportive VC will commit to putting in PRO-RATA or less IF there is an EXTERNAL LEAD.
When stated clearly, this should be VERY HELPFUL to the founders as they can leverage this with new investors.
More often than not, it is MORE BLURRY / COMMITMENT IS MORE VAGUE and it is VERY FRUSTRATING TO THE FOUNDERS.
Why do VCs not want to clearly commit?
Because they want to see what happens.
7. THE VC IS VERY SUPPORTIVE / MAYBE WILL PUT IN MORE MONEY IF...
Some VCs, especially if the company is a TWEENER - don't want to decide FOR or AGAINST.
They want the MARKET to decide.
They send the CEO to raise more money and become more or less supportive as raise goes on.
8. SUPPORTIVE VCs DO INTRODUCTIONS
This is the trickiest and most complicated piece -- VCs introducing founders to OTHER VCs.
It is a reputation game.
If I, as a VC, don't think this is a great business and I introduce this company to a VC, I LOSE SOCIAL CREDIBILITY.
This is a CRITICAL DYNAMIC to understand.
If a VC has company A which is CRUSHING IT and company B which is doing okay, then ...
If you introduce both to the same other VC, that other VC will compare QUALITY of THE INTRODUCTION.
It gets even more weird, when one VC calls the other one for the REFERENCE.
Listen, you've been working with these guys for years, what DO YOU THINK ABOUT THEM?
ARE YOU PUTTING MORE MONEY IN?
These are hard chats to navigate!
9. JUST HOW SUPPORTIVE IS YOUR VC?
So just how supportive is your VC really?
Are they going out to bat for you, doing dozens of intros? Did they commit to put in more money?
If so, then they are all in / very supportive.
Again, that is rare!
Is your VC doing a handful of intros and then throwing in the towel?
Are they offering help with materials?
They can't really think of other relevant investors?
They aren’t tracking your fundraise?
Maybe then NOT SO SUPPORTIVE.
10. VCs WHO ARE UNSUPPORTIVE
This is also rare but happens -- a VC becomes UNSUPPORTIVE.
This is most likely because they lost faith in the founder and in the business.
In this case, they won't take calls and won't do introductions.
This is NOT TYPICAL, but does happen.
11. THE JOB OF AN INVESTOR
Another way to look at this - great investors, whether a company needs more money or not, do their job but they make sure to always be telling the founders THE TRUTH (as they see fit of course).
No matter HOW DIFFICULT THIS TRUTH IS.
The biggest thing investors need to do is to tell founders when things are not going well:
THE BUSINESS IS NOT GROWING FAST ENOUGH FOR VENTURE SCALE
WHEN FOUNDERS SHOULD CONSIDER M&A OR POWERING DOWN
12. BUSINESS IS NOT GROWING FAST ENOUGH
Founders don't want to hear that things aren't going well.
The truth is most founders realize it, but would rather hear this from external vs. internal investors.
Great investors warn the founders AHEAD of the raise.
13. FOUNDER SHOULD CONSIDER M&A
At some point, investors have to decide if they would RATHER GET THEIR MONEY BACK vs. SPEND MORE TIME ON THE BUSINESS.
This is the HARD TRUTH because INVESTORS have limited time and sometimes they would rather cut their losses than get the money back.
14. SO WHAT DOES IT ACTUALLY MEAN FOR AN INVESTOR TO BE SUPPORTIVE OR NOT?
Some founders get upset -- WHY DON'T YOU PUT IN MORE MONEY INTO MY COMPANY? DON'T YOU BELIEVE IN ME / WHAT WE ARE BUILDING?
No good investor will send good money to bail bad money.
What does that mean?
It means that an investor who realizes that the business is not working & has no chance of generating an appropriate return WILL NOT put in more money into the business.
VC isn't charity!
Founders need to understand that VCs have a job to do and this is NOT PERSONAL.
No matter how much they LOVE the founder they CAN'T PUT IN MORE MONEY if the business DOESN'T WORK.
The complicated part is ALL OF THIS IS SUBJECTIVE.
The VC thinks the business isn't worth it — Founders believe great things are to come.
At the end of the day these are difficult personal decisions.
15. HAVING A GOOD RELATIONSHIP IS KEY
This is why it is so critical for founders to have GREAT COMMUNICATION AND AN OPEN AND CLEAR RELATIONSHIP WITH THEIR VCs.
Founders who don’t invest in their relationship with their VC will be put in a VERY TOUGH SPOT in this market.
SUMMARY
The VCs job is to make money
VCs will offer different types of support to a company depending on how they view it
Founders, especially in tough markets, need to focus on clarity and great relationships with VCs.
