Evolution Of The Entrepreneur-VC Relationship

  • 1.6.2016

Buzzwords from the last few months of 2015 included unicorpse, bubble and contracting market, juxtaposed with new and bigger funds being raised, more money being invested, more unicorns being born and the number of mega- increasing. As we enter 2016—and face increased interest rates—many predict a change in the investing environment. But before we get to that, let’s take a step back to see how the early-stage investor-entrepreneur relationship has evolved.

Coming out of the 2008-2009 financial crisis, the investor was the clear customer, but in the last few years we have seen a shift to the entrepreneur as the customer. Investors are vying to get into “hot deals.” It is easy to understand this shift when we compare over the last seven years. In most early-stage investments, participating preference has given way to 1X preference, and full- anti-, pay-to-play and are not so common anymore.

Median round size and pre-money valuations at the seed stage are also at a staggering high. While traditionally companies raised a seed round of $100,000-$200,000, it is now common to see $1M plus seed . Part of this change has been spurred by an increase in small, focused early-stage funds as well as an increase in the number of former entrepreneur individuals that are funding early-stage companies. As an entrepreneur in the driver’s seat, the questions you should are: What is the cost of this money? Will the investor make time for me and my company? What introductions can they make? In other words, do your and yourself: What is the value beyond the money the investor brings to the table? With entrepreneurs-turned-investors, one risk is that some people have trouble transitioning from the CEO role to that of an investor. One might also : Will this individual respect the distance and let the current CEO run his or her business without interference?

As an entrepreneur, you need to prepare for life after early-stage funding. Just as the early-stage funds are growing, so are the late-growth stage VC funds, and this is where most die. At this stage, you need to focus on key financial principles—remember, your investors have their own business models and demands. While capital markets are bifurcated between the East Coast and the West Coast, the fundamentals remain the same—you need to understand the VC reserves and the cost of capital for venture that most closely reflects the supply-demand curve.