Undergraduate Blog / Career Development

Not all VCs are made equal

When founders decide to seek capital from venture capital firms, they are making the conscious decision to catalyze the growth of their company. Money raised is spent on new team members, R&D, marketing and anything else a company can use to grow quicker. But when money is raised entrepreneurs must realize that their companies cost of equity goes up, this means the returns expected by investors will be higher than the return an entrepreneur expected prior to the investment. When it comes to early stage investors, there are two basic types hands-on and hands-off investors.

Hands-on investors

Hands-on early stage venture firms have investors that like to play an active role in their investments. They like to help their portfolio companies grow by making introductions to potential customers, negotiating contracts, handling legal issues, raising more money, and the list goes on. These investors are typically former entrepreneurs or former consultants who are experienced in operating companies and extinguishing the daily fires an early stage venture endures. Hands-on investors/firms are especially useful for young and first time founders, as founders can focus on building the core product/service or making sales while the venture firm can handle the miscellaneous tasks and creating processes that allow a startup to run more efficiently.

Hands-off investors

Hands-off early stage venture firms have investors that give founders money and then leave the management team alone. This is productive when working with experienced founders who know exactly what they must do to grow their company. When working with experienced founders, investors typically give them room to operate the company as they see fit, so that the entrepreneurs can operate without feeling like their investors are looking over their shoulder and judging every mistake that is made. Similar to investors that play a greater role in their portfolio companies, hands-off investors will help founders raise more money because it benefits both parties, but not much more can be expected from some venture firms/investors.

At the end of the day, two factors will determine the type of investors an entrepreneur gets investment from. The first factor is the firms that are interested in the entrepreneur’s company. No matter how badly you want a particular type of firm to invest in your company, they must first be interested. Second, once a founder has firms that are interested in investing, they must take the time to understand the characteristics of the firms and which firms will be most beneficial to the startup, because not all VCs are made equal.