Understand the Investor's Machine

Founders often begin by asking how to persuade a venture capital fund. A better starting point is understanding what the fund is and what obligations shape its behaviour.

A VC fund invests money collected from limited partners. Its managers are not only evaluating a founder’s company; they are building a portfolio intended to return capital to those investors within a defined model and time horizon.

Different funds need different companies

Funds vary by:

• investment stage;
• cheque size;
• sector;
• geography;
• ownership target;
• reserve strategy for later rounds;
• expected path to an exit.

A strong company can still be the wrong opportunity for a particular fund. A mismatch may concern stage, market size, capital needs, or the fund’s remaining life. Research is therefore not a cosmetic step before outreach. It prevents founders from treating every investor as interchangeable.

The fund is building a portfolio

An individual founder naturally sees one company as the centre of the conversation. The fund sees the company as one decision within a portfolio.

That affects how it evaluates risk and return. The fund needs some investments to produce large outcomes because other investments may return little or nothing. It therefore considers not only whether the company can become profitable, but whether the possible result is meaningful within the economics of the fund.

An exit is part of the model

VC capital is not intended to remain in the company forever. The fund eventually needs a way to realise the value of its ownership.

Possible paths include:

• selling shares to founders or management;
• a public listing;
• selling the company;
• a partial secondary sale.

The founder does not need to predict the final transaction before the first round. But the founder should understand that the investor is entering with an eventual exit in mind.

Research the partner, not only the money

Before accepting capital, ask the fund:

• What stages and cheque sizes fit your strategy?
• How do you reserve capital for follow-on rounds?
• What ownership do you normally seek?
• How do you support companies after investing?
• What does a successful exit look like for this fund?
• Who will make decisions about our company?

Fundraising becomes clearer when both sides understand the machine on the other side of the table.

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Source: adapted and translated from the venture-capital chapters of the Polish original Anioł w Piekle (2021).