Part of the job of a VC is to deliver on the promises they made to investors when raising the fund. Every VC defines their investment scope by a combination of thesis (e.g. invest in network-effect driven business), thematic interest (e.g. invest in AR / VR companies), stage (single stage versus lifecycle investment), ownership targets, and geography.
For example, our sweet spot at V1 is to invest in early-stage companies and platforms that leverage network effects and are based in North-America. When we’re pitched with opportunities that are outside this focus, it’s usually a quick no.
This is why it’s so important for entrepreneurs to do their research beforehand and identify a short list of target investors – these will be the investors who will not only be a perfect fit for you, but where there’s also a decent possibility of closing.
If you’re raising a seed round, don’t target a firm that primarily focuses on later rounds. If you are a healthcare startup, you shouldn’t waste your time pitching a firm who’s primarily focused on AR right now. Mark Suster wrote a great post outlining some of the basic research you should do before starting your fundraising.
With all that said, there are times when VCs may deviate from their investment focus. Such exceptions are rare, but they happen. That’s what happened when we invested in Coinbase’s Series D last year.
What will compel a VC to stray so far from their sweet spot? Making an exception is a signifcant risk and is a lot harder to explain to investors should the deal go south.
In the case of Coinbase, we had a pretty strong conviction based on several factors:
- As early as late 2016, we had a specific thesis on the blockchain/crypto being the next computing platform and we had made several investments against that thesis already, including Blockstack and Citizen Hex. Having a thesis and a few investments against the thesis made evaluating an exception easier.
- Crypto wallets and exchanges are not only the backbone of this new financial system, but Coinbase specifically had emerged as the clear category leader. They had built large moats around their business with their brand, user-friendly interface and approach to regulation, among other things.
- Even at the Series D valuation we felt confident that there was an opportunity that our investment would pay back the whole fund. Being a potential fund maker is one of our criteria for every single investment.
Investors are going to limit their exceptions to truly special opportunities. We think Coinbase was and is one of these opportunities and eight months into the investment, we feel very good about the decision we made. But as an entrepreneur, you need to keep in mind that such exceptions are few and far between. It’s much better to do your research upfront and focus on those investors who are the right fit.