Here’s a question I recommend founders ask Seed or Series A VCs during their fundraising: “What’s a risk you’re more comfortable with than the average VC?” In four years and hundreds (1,000?) of pitch meetings, I’m not sure it’s been asked of me. But I think it’s a good question ¯\_(ツ)_/¯
Why? At the early stages, EVERY company still has significant risks associated with it. A seed or Series A investor should be able to articulate the risks they perceive with a particular investment and why that risk is one they’re willing to take. Potentially the best founder <> fund matches come when both parties are clear about what needs to still be proven out -and- the venture investor has some ability to assist the founder in de-risking. If the investor is taking on a risk that fundamentally makes them uncomfortable, they’re going to pressure the founder to mitigate that risk as soon as possible, which *might* not be the right priority for the specific company.
Additionally, I find low conversion among investors who can’t articulate their specific investment thesis for a given opportunity and what they hope to discover during diligence. Whereas firms that can say, here’s the risks we care about and here are the ones we don’t, are coming to the discussions with a prepared mind.
What would I say for Homebrew? Here are two:
- We’re more comfortable with certain types of founder risk (first time, non-traditional) than some funds.
- We’re more comfortable that the startup’s story won’t yet be widely understood by the venture community at the A Round.
And here’s what a few other investors told me when I asked them this question:
Aileen Lee, Cowboy Ventures: “(a) comfortable with pre-product, pre market adoption risk, (b) comfortable with risk of founders being a couple or married, © comfortable with risk the most likely outcome is <$1bn”
[hunter note: (a) & ©, I’d claim we have equal comfort as Aileen, but (b), honestly, I’m not as comfortable with. See, this is interesting even in co-investors, because I’d want to do a couple/married deal with Aileen versus just by ourselves.]
[hunter note: borne out by her early investments in Dollar Shave Club, Warby Parker and others!]
“There are a bunch of risks we think through when evaluating a new startup:
- Team risk
- Technical risk
- Scaling risk
- Distribution / growth risk
- Market risk
- Financing risk
We’ve taken all of these risks at one point or another. For consumer startups, the hardest risk to take is distribution / growth risk since 99.9% of companies aren’t able to mitigate this one. We take it when we think the entrepreneur has an unfair advantage here that we believe may be sustainable (so more than a series of growth hacks). We’re comfortable with pretty much all of the others at Series A but we spend a lot of time thinking about and evaluating team risk and market risk since it’s hard to pivot your way around these if they pop up as major roadblocks later on!”
[hunter note: Leave it to the Series A investor to be the most “framework-oriented” of the three I asked 😉 ]