Choosing the Firm or the Partner #73

Jason Kirby
May 21, 2024

What's Below in Issue #73:

📰 - Choosing between a VC firm's brand and the partners at a firm

📊 - Relocating could boost your valuation by 60%

🎙️- Podcast #41 w/ Shane Newman, exited-founder turned angel investor

💵- Premium startup resources

🆓- Free startup resources

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------------------------------------------------------------------------------------------------------------------------------------------------------------There was a discussion amongst venture-backed founders who sold their companies in a group I’m part of where they debated whether you should take venture money from the firm or from the partner...

Now, you’re probably looking at me like 😕Money is green, ain’t it?

So, what does it mean to choose the partner over the firm or vice versa? When it comes to taking venture capital, smart founders know the relationship comes with more than just money. Let’s unpack this, assuming you have two competitive term sheets that are equal: one from a top firm with a mediocre partner as your lead and the other from a lesser-known firm with an amazing partner.

Let’s start by breaking down the differences:

There are VC firms and there are partners at those firms. The firm represents the collective brand and work of the partners as a whole. The partner is the individual you build a relationship with, who will often provide value, make connections, and sit on your board.

Choosing the Firm Over the Partner

Choosing the firm means you’re choosing the brand name of the firm. For example, just saying you raised from A16Z, Sequoia, or YC gives you instant credibility. You’re accepting money from a brand name VC, often referred to as “Tier 1 VCs.”

Why should you take money from a Tier 1?

  • Instant credibility: Fellow founders and potential large customers will take you seriously.
  • Easier fundraising: Other investors will be more willing to invest when they see a Tier 1 VC has already done so.
  • Attract top talent: High-quality candidates will feel safer joining your company with a big firm backing you.
  • Increased press coverage: Journalists love covering big raises from Tier 1 firms because it attracts a lot of attention.
  • Founder street cred: Other founders will think you’re special, and you’ll have instant street cred in the founder ecosystem, regardless of your business's success.

When should you not take Tier 1 money?

  • You’re not aiming to reach decacorn status ($10B+ valuation) or don’t believe it’s achievable for your business.
  • You don’t want or need press coverage.
  • You don’t like the partner/principal assigned to your board.
  • You’re not ready to negotiate your term sheet aggressively.
  • Partners can leave, meaning the firm might reassign your board seat to someone you don’t have a relationship with.

In my opinion, take the money from a Tier 1 if you’re given the opportunity and you really want to go big. But remember, raising from a Tier 1 firm doesn’t equal success. Look at FTX, Bolt, and countless other startups that are in trouble or have disappeared. 😨

Choosing the Partner Over the Firm

There are times when you get a great partner at a Tier 1 firm—a slam-dunk situation. However, some amazing VCs run solo firms or have lesser-known brands but stellar individual reputations and networks. These are often partners with specific domain expertise and experience as former founders themselves.

These VCs compete against Tier 1s not by offering higher valuations but by demonstrating their value over time, building trust, and establishing a solid 10-year partnership. Most successful VC-backed startups are in the game for 7-10 years together.

When should you choose a partner over a firm?

  • You’ve known the partner, and their objectives align with yours.
  • There’s inherited trust between you and the partner.
  • The terms are equal or fair compared to other term sheets.
  • The partner has already demonstrated value by opening doors to customers or key hires.
  • They are proactive and willing to help you when needed.
  • They are less likely to oust you if things go south.
  • The partner is unlikely to leave the firm, as they may have founded it.

When should you not prioritize picking a partner over a top firm?

  • You haven’t known each other for at least 6-12 months.
  • You don’t feel comfortable calling them when things go wrong.
  • The term sheet is complicated or not aligned with competitive offers.
  • They refuse to assist you or add value before you sign a term sheet.

Final Thoughts

When you’re in high growth mode and things are lining up for a successful capital raise, the answer might seem obvious when you see the term sheets. You might lean towards the biggest firm name with the highest valuation. But take a minute to reflect on the relationships you’ve established with all interested investors and ask yourself:

Who do I want in the trenches with me when things aren’t going well? Are they going to fight alongside me or bail or stab me in the back?

Make sure you have a confident answer to that question. Remember, you’ll be living with that decision for 7-10+ years, and it could make or break your company.

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Moving From San Diego or Miami to SF/Boston/NYC Could Bump Your Valuation 60%!?!?

Worried about dilution? Maybe consider moving to a top VC city like SF, Boston, or NYC. Your zip code could increase the value of your company by 60% or more. Why is that? 

It's because talent and investors/capital are concentrated in those markets which increases your chances of succeeding and increases your operating costs. So it's normal for investors in these markets to increase the valuation to accommodate. 

Is it worth relocating just for valuation? Definitely not IMO. But it's worth considering the pros and cons of moving to a Tech Hub if you're looking for investors and talent.

-----------------------------------------------------------------------------------------------------------------------------------------------------------Listen to Why Shane Newman Is Your Ideal Angel Investor on Episode 41

Fundraising Demystified Episode 41 with Shane Neman Youtube Thumbnail

In this episode, Shane Neman, an angel investor and founder, shares his entrepreneurial journey from starting businesses during the DotCom bust, facing failure on his initial tech venture, to selling his companies and transitioning to investing.

As an investor, he looks for game-changing ideas and founders who don't necessarily need the money. Neman provides tips for founders on standing out in a crowded market, getting in front of investors, making good impressions, growing their businesses, and raising money. He also covers the challenges of getting out of deals and generating returns.

This story can inspire founders to look beyond traditional paths and explore how their unique capabilities can address unmet needs in diverse sectors.

Check It Out

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