Choosing VC is also a science: the survival wisdom of encryption founders

Author: Alana Levin, Variant Investment Partner

Compiled by: Luffy, Foresight News

Original Title: Reverse Screening: How Do Crypto Project Founders Select Suitable VCs?

Just as VCs conduct due diligence on investment projects, founders should also conduct due diligence on potential investors.

The primary task of a VC is to increase the chances of a company's success. VCs can achieve this goal in various ways, and determining how each investor can effectively support their startup should be the core of the founder's due diligence. From the founder's perspective, I would filter VCs based on the following criteria.

First of all, can VCs really increase the chances of a project's success?

Can investors provide other value besides just pure funding?

I think it's possible. Through communication with the founders, here are some of the most commonly mentioned ways that VCs can truly provide help.

Brand: Gaining support from "first-tier" venture capital institutions usually (at least in the short term) enhances the company's brand. This provides direct assistance in recruiting talent. The brand halo effect is slightly less impactful when recruiting the initial 10 employees, but it becomes crucial for attracting talent once the company reaches the Series A financing stage or thereafter. Given that early hires have a significant influence on the company's trajectory and culture, the ideal approach for founders is to attract this talent from their own personal networks.

A strong brand means that the organization or partner is widely recognized, highly respected, and regarded as an important factor in the success of the project. Success is the best brand.

Knowledge and Insight: Do investors have experiences that can be referenced, thereby providing useful advice to entrepreneurs? Are they particularly adept at identifying factors that influence the market or business?

There are actually two points here: first, the relevant experience that VCs may accumulate from successful companies in their portfolio (or similar experiences as founders themselves); second, their ability to provide a clear understanding of broader market dynamics and how these dynamics may impact companies in the next 6 to 12 months.

Networking: Sometimes VCs can help founders (or heads of other departments) connect with the right people. "The right people" may include other executives with relevant experience or potential clients. Founders still need to rely on themselves to win business; very few clients are acquired due to the influence of VCs. However, investors can certainly help entrepreneurs at least open some doors they wish to enter.

Promotion Channels: Some VCs have their own audience, and thus becoming a "KOL" is part of the value they provide. This is now evident: many VCs are trying to establish their own promotion channels through podcasts, newsletters, X accounts, etc. Sometimes, these channels can indeed become effective means for raising awareness and driving traffic for new startups.

You have received an investment invitation, what should you do next?

First of all, congratulations! You have the opportunity to choose from a range of competitive investment offers, which is both an achievement and a privilege. Take some time to enjoy the process.

You likely already have some intuitive judgments about the party you want to collaborate with. The due diligence process often reveals certain situations, such as the types of questions people ask, the insights they share throughout the process, their response speed in following up, and whether there feels to be a cultural fit, among other things.

It's time to validate this intuition. Here is the process I will follow, in no particular order:

Conduct background checks on investors: These checks should cover successful companies in the VC portfolio, as well as those that are on the brink of or have already gone bankrupt. It is important to understand how the investors act as partners in both successful and stressful situations. Ideally, these references should be companies that have also collaborated with the investors you are considering partnering with.

Check for conflict risks: Does the institution have a history of investing in competing companies? More importantly, have they invested in any companies that could theoretically compete with yours?

Consider the tenure of partners in the organization: Typically, the choice you make is both an institution and an individual partner. I encourage more founders to inquire about the aspirations and future plans of potential partners. A relevant thought experiment is to ask yourself: If this partner left tomorrow, would you still be interested in this organization?

Determine whether the institution matches the stage of your company: whether a fund continuously invests in companies at the same stage as your company will affect the usefulness of its resources, the degree to which your company is prioritized in resource allocation, and the relevance of the advice that investors can provide. A $1 billion fund providing a $5 million seed round investment constitutes only 0.5% of its total allocation. Frankly, if a fund invests $50 million to $100 million in later-stage companies, it becomes more difficult for earlier-stage companies to gain the institution's internal attention and assistance.

Understand the institution's view on exit: This may sound a bit strange. However, in an era where IPOs are becoming increasingly rare, understanding investors' perspectives on acquiring or selling secondary equity can help you avoid many troubles in the future. Similarly, in the cryptocurrency space, understanding investors' views on token sales is a useful reference for token design and launch strategies.

Choosing a partner is often a "one-way street." Selecting the right VC can never "make" a company, but it can increase the chances of success for the company and at least make the founders' days a little easier. Spending a few extra days conducting due diligence on potential investors may pay off in the long run.