When I talk to software venture investors, there is one question that reveals their stage focus 100% of the time.
It’s like a law of gravity that can’t be defied.
Here’s the question:
How big is your fund?
If they say $300 million or a billion, then they invest in bigger and later Series C and D investment rounds, with some unusual B rounds.
These are late-stage investors who help these post-startup companies go public or get acquired for multi-billion valuations.
Companies used to go public with $100M revenues in the ‘90s and the ‘00s. Nowadays the biggest venture funds invest here and capture the early value.
It’s “unicorn or die” with billion-dollar venture funds. And they know that half or more of their investments won’t make it.
If their fund is $30M to $150M I know they invest in serious seed rounds and Series A rounds with early-stage startup companies, with some Series B double downs.
Smaller funds do smaller and earlier deals.
Why is this a hard and fast rule?
Simple. The size of their latest fund (the money they raised from outside investors) determines the range of size of each individual investment.
This happens because the VC investment team can only spend so much time with each company they invest in.
Only 1-5 VC principals at each firm, sometimes a few more. So a fixed amount of deals they can invest in to provide ongoing individual support and oversight.
Some firms want to lead investment rounds and take board seats, which is great. These VCs take on fewer deals than venture firms that don’t lead and take board seats.
VCs raise funds and their clock starts ticking to invest in the best 20-50 companies so they can pay back investors in about 7 years. Each fund has a 7-10 year run.
And some venture investors don’t have formal funds at all. Like tech-savvy family offices or organized angel networks. They just find the money when they want to invest.
What does this mean for startup software founders?
1) Founder-funding fit is real.
Don’t spend time dating potential investors that don’t invest in your size, stage, and exit scenario.
Big fund investors need unicorn outcomes. Some smaller funds can succeed with smaller exits under $50M, but not all.
2) Investors have lots of experience at the stages they invest in.
They usually don’t have experience with or empathy for crazy early stages if they have big funds.
3) There is a big difference between pre-seed, seed, and Series A investments as they are currently defined.
Most Series A investors need big returns and want you to raise more B and C rounds to grow big.
Some pre-seed and seed investors are happy with 3-5X returns in 3-5 years. But crazy high valuations don’t work here.
Growth equity investors invest Series A level in startups with $3M-$5M bootstrapped revenue and like steadier growth.
Serious VC funding is not for most software companies.