Why do so many VCs say "come back to us when you have a lead?" Is it because they lack "guts" or "conviction" or want to piggyback on someone's work and experience? Sometimes, yes, these are the reasons. But much, much more likely the reason is the mismatch of check size and runway (or round size). E.g., let's say a company has $50k monthly burn, and they want to raise $1M to have 20 months of runway (simplification) and enough time to get to the next milestone to raise at the higher valuation. And let's say a VC really likes the company and is willing to invest. But their check is $100k (based on the fund size, they can't do more). Should they sign and wire? If they do, the company will have 2 months of runway, and if no one else invests in these two months, the company will go bankrupt and it will be a really quick write-off for that VC. So that VC has to wait until you have at least half of the round ready before they sign and wire, to make sure the company has a chance to get to the next milestone. I also was in a situation of investing early with a small check that didn't give enough runway. Thankfully, thanks to our LPs, we were able to increase the check size over time, so now we can move in first into small rounds (when a company has low burn) - $500-700k rounds. However, if a company needs to raise $2M or $3M, our check is still too small to go first. It's useful for founders to understand how VCs operate.
Another reason aside from lack of conviction they may ask for a lead is because they don't feel like they 100% have the expertise and would like to co-invest with someone whom they can feel confident does have the expertise needed.
Totally makes sense.
This is the first time, I have seen this factual explanation. Will definitely help new founders to understand this issue better. 👏
Guess thinking about it opens a new perspective on looking why some revenue makes it easier for VCs to make a decision. Just because the company at least can run
Understanding the dynamics of funding rounds is crucial for founders. 💡
„Come back when” is a polite way for saying no :)
Make sense, thank you 👍
Useful to know!
VCs ask for a lead because of the mismatch of check size and runway Ihar Mahaniok
Helping game developers to increase LTV by running smart LiveOps.
6moThat's true, Ihar Mahaniok. If a VC wants to invest, they'll invest; everything else is just an excuse. However, they like to keep a foot in the door so they can jump aboard the success train if it starts leaving the station. Founders are well aware of this game, too. It's a tricky game, so finding a good match between founders and VC is crucial.