When entrepreneurs think about approaching VC’s to cultivate a relationship for a round, they often try to match their company with what the VC has funded in the past. It’s pretty rational. That investor should both know more about the sector than the next person, and should have an inclination to invest in that sector as well.
I’ve tended to find that this doesn’t always work. Often, a VC that has invested in a sector has a particularly high bar for their next investment in that same space. Once you have gone deep in an area, you are 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 that you have some knowledge in, 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 ad-tech space. You see investors dive deep into ad-tech, 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 ones where success can be found, but they are also very competitive and have particular challenges (eg: 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 have 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 getting to know the founders that an investor has backed gives a really strong clue as to what kind of people that 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 and Jeremy at Sunrise, and by watching the success (and joy) that old colleague Bijan had in working with folks like David Karp when I was at Spark. There are some other personas that I tend to gravitate towards as well, but that’s an example.
By the way, this also lends a bit of a clue as to how you might want to shape your founding team. You can look beyond just the founder/CEO to what the first 2-3 people on a team looked like at the time of funding. You can’t really change who you are, but you do have influence over who you found your company with and who your first 1-2 team members are. Again, 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 you are thinking about how to best approach investors, don’t automatically just pattern-match based on sectors. Try pattern-matching based on the profiles of founders and their founding teams. It’s a people business after all.