Here’s what stuck out after I reflected on my first year as Head of Deal Flow for Newlin VC, a Seed/Series A fund headquartered in the US:
1) The best deal flow wins
This may be obvious: If you don’t see the best deals you can’t invest in the best deals so it’s paramount that you’re attending solid pitch events, networking with other VCs, plugging into accelerator programs, etc. But point here is that I didn’t find that actually winning an allocation on the cap table was the truly difficult part. Said another way, there was less “winning” after the deal lands on your desk. The “winning” is frontloaded to the sourcing side of the house so you better have great inbound and outbound deal flow and a process to vet deals quickly. This observation may be a factor of investing early at the Pre-Seed, Seed, and Series A stages because once the word gets out on a great start-up, there will be more VCs jockeying for position than spots available in the raise (even if it becomes oversubscribed).
2) Not all founders want “strategic” investors
Similar to how I thought that winning an allocation would be more difficult than how it worked in practice, I also thought that all founders we’re interested in having strategic investors. I expected to be just as much the interviewee as the interviewer during founder calls. Sometimes this was the case, but more often than not the discussions of our value-add industry knowledge, ability to make quality connections, and strategic support for future raises were a much smaller part of the process than expected. Money is a commodity, especially in today’s cheap capital world, but founders want to get funded as quickly as possible so they can stop burning time and resources on the fund-raising trail and move on with business building. So, after the lead investor and a couple other key strategic advisors, founders want capital. If there are too many strategic cooks in the kitchen it becomes more of a headache than what it’s worth.
3) Disparity between US-based and non-US based startups
As an early-stage fund, we’re pretty unique at Newlin because we invest cross border while most smaller funds can be very regionally focused and rarely invest outside of the US. We focus primarily on North and South America but do invest globally including making our first investment in South Asia during summer 2021. It was amazing to see the contrast in valuations between startups outside of the US and those within he US. It’s been incredible to see companies outside of the US that have already proved product market fit with significant revenue traction valued at a fraction of competitor startups in the US with substantially less progress. I understand some of the additional concerns for investing in startups outside of the US: We don’t know the markets as well, there’s more economic uncertainty, there could be additional political risk, the legalities of investing in a non-Delaware C corp. may be riskier, etc. etc. But investing in venture is inherently risky and the opportunities I saw outside of the US were too good to pass which resulted in half of my investments being non-US. VCs want to invest in great founders and great solutions in large addressable markets. Believe it or not you can find this outside of the US as well and (tagging along to my earlier point) it becomes even easier to get a cap table allocation if you’re a US investor in another country – foreign founders want the additional validation from having US investors on their cap table at an early stage and it will also help them enter the US funding market during their growth phases.
4) Inflexibility of some early-stage funds
Look, I get it – VC’s need to have a focus. Invest in what you know. Whether that’s strong industry focus, regional focus, valuation focus, etc., you can’t possibly be agnostic across the board or you spread yourself too thin. But how hard do you draw this line? The industry focus makes the most sense. Not only do you want to invest in what you know but you’re also making yourself savvier as you see similar companies in your industry(s) of focus to make more informed decisions and also give founders deeper perspectives on what you’re seeing in the market and how a potential strategy pivot could help them. Some funds are dedicated to building the ecosystem around a certain city (potentially because a public/private funding scheme mandates their investments be more regionally focused) which makes sense while others simply feel the Midwest is more undercapitalized than the coast which lead to more opportunities and higher returns. But will you really not look at a deal in New York that ticks all your other boxes? Similar on valuation thesis. Many early-stage funds have a strict valuation ceiling to keep their eventual returns metrics as high as possible. Are you really not going to look at a deal with a $8m valuation cap when your thesis is $7m? We’ve drawn the line and passed on some deals that had an egregious valuation but we’ve found it beneficial to be flexible wherever possible.
With this in mind, I’ve often wondered how often (if ever) VCs change their thesis. Certainly, over the years we live and learn and maybe what we once thought was a strong thesis no longer is or through close attention to the markets, we see a burgeoning industry that’s too compelling not to dive into.
5) Helpful VC community
I heard this often before jumping into VC and nothing I’ve experienced refutes that point. The VC community is extremely helpful and supportive. My start in venture was through a referral from a VC within my network and the willingness for other VCs to pick up the phone for deal flow or other general knowledge sharing continues to impress me.