When entrepreneurs think about approaching VCs to cultivate a relationship for a round, they often try to match their company with the sectors in which the VC has invested in the past. That’s pretty rational. The investor likely knows more about the sector than the next person and theoretically has an inclination to invest in that sector again.
But I’ve found that this doesn’t always work.
Often, a VC that has invested in a particular sector has a particularly high bar for their next investment in that same space. Once you’ve gone deep in an area, you’re exposed to all the non-obvious challenges and hardships associated with that market segment, which makes you very, very pessimistic and picky.
Sometimes, it’s easier to invest in an area where you have some knowledge but don’t know all the gruesome details — after all, it’s nice to have some level of ignorant optimism.
There are quite a few examples of this. I think this is particularly true in the adtech space. You see investors dive deep into adtech, make some investments that are pretty successful, but then pull out just as someone else enters to take their place. The same is true for e-commerce. Both markets are obviously areas where success can be found, but they are also very competitive and have particular challenges (e.g. the capital intensity of ecommerce, bad exit multiples, etc.).
So, I think it’s sometimes tough to pattern-match based on sectors. But I do think it’s pretty successful to pattern-match based on founders.
When an investor has success with a particular profile of founder, they tend to be enamored by founders of a similar ilk. I’ve had multiple conversations with investors that say something like, “I really like this company, the founder reminds me of (insert name) when he/she started (insert successful portfolio company).”
Investing in startups is a very personal business, and as someone who is going to be spending a lot of time with a founder, investors tend to gravitate towards similar profiles of people.
What this means is that the types of founders an investor has backed — rather than just the types of companies — gives a really strong clue as to the people the investor will gravitate towards. It also means that the best way to get introduced to an investor is often through the founder of another one of their portfolio companies, and it’s even better if you have similar attributes to that founder at the time they started their business.
For me personally, I tend to be obsessed with what I would call deterministic, design-focused product founders.
This is driven by my experience working with Pierre Valade and Jeremy Le Van at Sunrise (acquired by Microsoft) and by watching the success (and joy) that my old colleague Bijan Sabet at Spark had in working with folks like Tumblr’s David Karp.
By the way, this idea of “founder-matching” with investors could also lend a bit of direction as to how you might shape your founding team. You can look beyond just the founder/CEO to what the first two or three people on a team looked like at the time of funding and, with that information in mind, better understand how to hire for a great early team.
In the end, you can’t change who you are, but you do have influence over who you found your company with and who your first few team members are. I don’t think you should ever make hires or shape a team for investors, but I think this is an area where past performance can be an indicator of future performance.
So if you’re doing your diligence on investors, don’t start with the sectors where they appear active. Look at successful founders in the portfolio first. Ultimately, this is all about people.