An early-stage founder’s guide: What you need to know before working with VCs

Photo credit: mavoimage / 123RF Stock Photo

This is a five-part series by Clement Vouillon with help from those at Point Nine Capital.

For many early-stage founders, it’s unclear what working with VCs means and how they should prepare for it. This is perfectly fine. After all, it’s better for a founder to be an expert in their field rather than in venture capital.

This guide is intended for founders who plan to raise their first round with “institutional” VCs (aka VC firms, not business angels). I’ll try to answer the question of “What does it mean to work with VCs?” by describing the different interactions you’ll have with investors throughout the whole process:

• Part 1: Before working with VCs
• Part 2: Preparing your fundraising
• Part 3: First contact and assessment phase
• Part 4: From term sheet to signed deal
• Part 5: Post-investment

This guide is not a technical guide that will teach you how to create a pitch deck or how to read a term sheet. There are plenty of great posts already covering these aspects, some of which are linked in this guide. I’ll focus more on describing the interactions that you’ll have with VCs during this journey.

This is also just a framework. Your own particular experience with VCs will depend on a myriad of factors, such as who you are interacting with, the structure of the deal, the industry you’re operating in, your location, how “hot” your company is, and many other factors.

The 2-minute video TL;DR

Before starting your fundraising process, it’s important to:

• Understand how the VC model works
• Define the most important values that you expect from VCs: money, mentorship, branding, and a network
• Think whether the VC model is aligned with your aspirations as an entrepreneur or not

How does the VC model work?

Why do VC firms invest money in startups? To get a return on investment.

Most VCs you probably know are middlemen. They raise money from various sources (sovereign funds, foundations, family offices, large corporations, etc.), which are called limited partners (LPs), to invest in startups they believe can grow enough to provide a healthy return on investment. They invest x amount of money to acquire y percent of a startup. If the startup grows, its value increases, and as a consequence, the initial investment also increases.

The VC firm gets its cash once an exit happens. This means that the startup is either acquired by another company or goes public. Then, the VC firm splits the earnings between their LPs and themselves.

The goal of VC firms

What value should I expect from VCs?

Is the VC model aligned with my aspirations as an entrepreneur?

Main takeaways