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The Five S’s Of VC Deal Filtering

Eze Vidra is Managing Partner of Remagine Ventures, a seed fund focused on tech startups shaping how consumers spend their time and money.

There’s raising smart money, and then there is raising money smartly. The venture capital fundraising process can be lengthy and test the patience and fortitude of even experienced entrepreneurs. Part of the challenge lies in finding the right investor for the startup, and it often involves hearing no several times before the desired term sheet.

While the team, market and technology are important criteria for VCs to evaluate an investment opportunity, there are several filtering criteria that VCs apply — more or less explicitly — on every lead before even taking a first meeting with a startup. A typical VC fund evaluates hundreds if not thousands of investment opportunities in a given year and very few companies will go through the full due diligence process.

In the spirit of helping entrepreneurs be smart about how they invest their limited time for fundraising, in this post, I’d like to share the basic fit required to get to a pitch meeting and significantly increase the chances of success for the startup. Said another way, here’s the initial deal filtering process to consider so that you approach the most relevant VCs for you and your startup.

These are the “five S’s” of a typical VC filtering process:

1. Stage: Many VC funds are stage specific (preseed, seed, series A, early stage, growth, etc.). That means that they’ve raised money based on a strategy they communicated to their investors, and while there can be exceptions, the bar is much higher for a fund to invest outside of its strategy.

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• Takeaway: It’s best to approach funds that invest at the stage you’re raising for. Definitions of rounds (size-wise) might change depending on the country.

2. Stake: Most VC funds have a ticket size range they are used to writing (say, $500,000 to $1,500,000 in seed funds) and they typically expect to get a range of equity for that amount. Similar to stage, this is part of the fund’s strategy and was communicated to the fund’s investors. This can vary from fund to fund, but roughly speaking, most early stage funds aim for a minimum target equity of 10%.

• Takeaway: Ask the VC if they have a minimum equity target. Approaching funds for a small piece remaining in a round (say, $100,000 left in a $3 million seed round) is likely a waste of time.

3. Sector Or Segment Focus: Some funds are generalists, but many are sector specific or thematic. They specialize in specific areas such as vertical themes like gaming/entertainment, horizontal like B2C/B2B across categories, or gender/ethnicity based. Sector specialists build deep networks and develop theses about interesting opportunities in their spaces.

• Takeaway: Put specialist funds on your shortlist. They are more likely to “get it” quickly and will be able to put their networks to work for you more effectively.

4. Spatial (Or Geo): Many funds have a geographic focus or restriction. It might be country, region or continent specific. It’s not always very straightforward. For example, we at Remagine Ventures focus primarily on Israeli startups wherever they might be based. We have invested in teams that are based in London, New York, Los Angeles and Tel Aviv, but we normally require an Israeli angle/founding team. This is because our investors wanted specific exposure to that geo.

• Takeaway: Investing in companies outside of this filter is possible, but raises the bar. Find out if the fund you’re approaching has a geo focus.

5. Similarity: VC funds don’t always disclose their full portfolio, as some companies might decide to delay the announcement of their rounds. But for the most part, VC portfolios should be publicly available. VCs are likely to turn down companies that directly compete with their portfolio to avoid conflicts of interest. Said another way, you don’t want to approach a VC with an existing portfolio that is too similar to you.

• Takeaway: Find out if there’s a conflict by checking the VC’s portfolio page or researching the backers of direct competitors before sharing your full materials. Still not sure? You can ask the VC directly.

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These filters might seem obvious, but you would be surprised how many founders ignore them. As the saying goes, “When you’re a hammer, everything looks like a nail,” and many founders will be tempted to email large numbers of potential investors that they’ve found on a list, thinking that it might increase their chances of finding the right match. But that approach is likely a waste of time, just as applying for a job without a targeted cover letter can be a waste of effort. A more thoughtful approach takes more preparation but is likely to result in more meetings and fewer wasted cycles.

To make the fundraising process more efficient, founders will benefit from putting together a thoughtful target investor list, after doing some homework. Who are the specialist investors in your field? Are there geo-specific funds in your area? A well-researched list of target investors is likely to save you overall time in the fundraising process and increase “conversion” with relevant investors.

In my next post, I will cover how VCs evaluate a potential investment opportunity from the first meeting, as well as the takeaways for founders on their pitch and materials.

Forbes Business Council is the foremost growth and networking organization for business owners and leaders. Do I qualify?


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