The Path to Financing: What Three San Diego VCs Wish Entrepreneurs Knew
When it comes to venture capital, there is a finite amount of money being sought by an ever-growing number of innovators and entrepreneurs. The path to successfully securing some of that funding often seems undefined and difficult to navigate. This month, San Diego Venture Group sat down with three San Diego venture capitalists: Dan Burgess, venture partner at SV Health Investors; Kim Kamdar, Ph.D., partner at Domain Associates; and Jay Lichter, Ph.D., president and CEO at COI Pharmaceuticals and managing director at Avalon Ventures. They offered their insights for entrepreneurs starting down the path to financing.
Know the Life Cycle of the Fund
Deal making is centered around the life cycle of the venture funds for each firm. Understanding where each fund is in their life cycle could be key in reaching the right partner at the right time.
The typical life cycle of a venture fund is ten years. Investment is heaviest in the first three to four years, and then partners begin to raise a new fund. Around year five of the old fund, firms begin investing the new fund and the old fund continues to be managed out. During these later years, opportunities become more and more narrow. The speakers advised being vigilant on when funds close, as well as how often deals are being made.
“You have to be a detective in some ways,” said Dr. Lichter. “Look at the pace of investing. If the fund hasn’t done an investment in a year, probably not a good place to go fishing. But if they are doing one or two deals a quarter, then they are in the mode for doing deals.”
Dr. Kamdar expands on that idea, “Hypothetically, for every fund, each partner gets to make two or three deals. [As the fund gets older], figure out who still has the bandwidth to take on new deals.”
All three panelists said entrepreneurs can determine where a fund is by looking at press releases from the firms or following the announcements from companies that are receiving their investments.
Understand A Firm’s Portfolio Construction
While many venture firms collaborate on deals, they are also competing for investors. Knowing what each firm leverages to attract investors can help determine interest in a project. The firm’s leverage comes from their portfolio construction – how a firm manages risk amongst their portfolio, and how that management will perform better compared to other venture firms.
“When you reach out to a partner or a firm, you want to know the deals they’ve done and get an idea of how they are building their portfolio. Then consider how your project might fit in the construction of that portfolio,” advises Dr. Lichter. “From my standpoint, one of the first kill opportunities is whether or not this project fits into the context of my investment interests without being duplicative to past or present deals. For example, if I’ve just completed a successful deal in animal health, I am not very likely to invest again in animal health.”
Make a Connection
Keeping in mind that venture firms are presented with hundreds, if not thousands, of project each year, and only a handful of projects are selected, having a relationship or connection in some way with the VC is of utmost importance.
“We are always interested in business plans that come from an entrepreneur that, in one way, shape, or form, we know. Either as a connection from another entrepreneur or it could be from the law firm they are utilizing that knows us well. We are much more likely to say ‘yes’ if someone already vouches for the person,” said Dr. Kamdar.
Dr. Lichter concurs, “A connection is particularly important for us. We have 70 employees in our incubator space. If someone comes to us and they are not in the network of any of those employees, it’s not a good sign.”
When approaching a venture firm, finding the key contact can be the catalyst to getting a foot in the door. The panelists highlighted that even within a firm, not everyone has equal pull to make deals, nor are all partners currently focused on making deals. Identifying the appropriate contact can go a long way to speaking with someone about your project.
“Find someone who knows your therapeutic area well, because that is where they are going to have the most credibility. Ideally, it is a senior managing partner. Most venture partners are trying to start their own companies. It is the managing partners who are there for life that tend drive the deals,” said Mr. Burgess.
Stand out as an Entrepreneur
When firms are looking at projects, the kind of person the entrepreneur is holds a significant amount of weight. What are the qualities these VCs look for in an entrepreneur?
Mr. Burgess looks for a good story teller. There will always be a need to keep raising money. Even with a great technology, if an entrepreneur can’t communicate the story, fundraising will be a challenge.
Dr. Kamdar said she looks for experience, passion, and integrity. All three of which she can determine in the first meeting.
As the relationship will have to last for at least five to seven years, being a good listener and a good partner were distinguishing characteristics for Dr. Lichter.
Considering the funding cycle, what connection you have to the firm, and how you can stand out as an entrepreneur could go a long way to securing a meeting with a VC. Think you have what we’re looking for and the time is right to pitch? Submit a 100-word description here.