Should a founder care about the VC lifecycle?
“For everything there is a season, a time for every activity under heaven.
(…) A time to plant and a time to harvest.” (Ecclesiastes 3)
From the cradle to the grave
It is seemingly unnecessary for a startup founder to understand the nuts and bolts of how VC’s operate. After all, a founder should know about THEIR business, market or product, right? On the other hand, a founder WILL care about the budgeting timeline of their potential, corporate customer to be there at the right time with the right offer.
It is quite similar with VC’s. If you want to raise money when a VC fund is in the midst of their own fundraising (or, per analogy, if you try to harvest when it is time to seed and plant), the odds are against you. We touch on this subject in one of our Newsletters [read it here], but here I wanted to offer a slightly different perspective.
So, what does the typical lifetime of a VC Fund look like?
It all starts with a fundraising period which (hopefully) leads to a so-called “first closing” of the fund. The first closing usually happens when commitments for 50%-60% of the target size of the fund are collected and the fund can begin operations. However, a lot of work is still to be done to reach a “final closing” of the fund at its full target size.
After the first closing, the VC is allowed to start investing and it can invest in new startups until the end of the investment period. The time span between first and final closing tends to be between 6 months and 2 years, and the entire investment period is usually assumed to be between 3 and 5 years. Of course, during this period follow on investments in portfolio companies can be done, and sometimes exits do happen, but usually that is the domain of the next period.
When the investment period ends, several things happen. On the one hand, the VC usually cannot (without special approvals) make investments in new companies (only being able to support its portfolio companies), and on the other a new fundraising process, to raise a new fund, begins.
In theory, VC funds should usually be wound down in year 10, but in practice this happens later, on average around year 13. This is when a particular fund with particular investments ceases to exist. By this time, good fund managers will have raised two or three new funds.
So what is the best time, from this point of view, to approach a VC? Obviously when there is money available and there is significant motivation for the managing partners to make new investments — in the investment phase, or even more precisely, the first half of the investment phase. Of course, a VC can make investments until the end of this period, but the closer it gets to this moment, the less freely available resources there are and VC’s become much more picky in their decisions (if they were not picky enough already!).
“No” means “no”. Or it doesn’t.
Ok, so one could ask whether it makes any sense at all to approach funds during the fundraising process or towards the end of the investment period? Leaving aside the challenge of assessing such moments in time, I would still say it makes sense to approach good VC’s, no matter their lifecycle moment.
The reason is that building a proper relationship and getting on the radar of such VCs will pay off in the future. It is, in a way, investment in the future — no tangible results immediately, but with potential benefits coming later, further down the road.In my opinion, all this boils down to certain expectations and our ability to understand the other side’s position while fundraising. As VC’s will not usually tell you that they are fundraising and cannot invest at the moment, it is important to correctly read the message and understand when “no” really means “no” for some very well defined reasons, or else when “no” actually means more along the lines of “keep in touch” and “get back to us in a couple of months”.
