I remember talking with my Dad about the absolute necessity of having Tier 1 investors for my company. I was an EIR (Entrepreneur in Residence ) at a San Francisco based VC fund at the time, and I had just formed my company.
In fact, we hadn’t even started raising money. Yet here I was, droning on and on about how important it was for us to have Tier 1 investors.
My Dad had a certain look and voice tone that used to scare me to death. It was as if his eyes could just penetrate into my brain. He started giving me that look, and then he said:
“Everyone’s money is green.”
There it was. It so obvious. It was so true. Of course, everyone money is the same.
My Dad wasn’t saying you should ignore whether your investors were going to supportive. My Dad wasn’t saying you should ignore whether your investors are going to be able to provide useful guidance.
My Dad was saying that your primary goal if you’re raising money is raising money. Once you've got the money raised, then you should worry about the other value your potential investors bring to the table.
Having Tier 1 investors may not help your company succeed.
So, off we went to raise our initial funding. We struck gold almost immediately when Gill’s fund agreed to give us $5.5M of the $11M we were trying to raise.
I don’t know whether Gill’s fund was considered a Tier 1 VC fund or not. It’s not like there’s a rating label on a fund that says the fund is Tier 1. But I did know that Gill had a great reputation, so I was happy to work with him.
It took some time (the Great Recession kind of held up our fundraising for over one year), but we landed “Donald Ventures” as our second investor. Donald Ventures I believed qualified as a Tier 1 investor.
If you did a search of Tier 1 investors, Donald Ventures would likely be on the list. Yet Donald Ventures was the last choice on our list of possible investors.
You see, we knew that Donald Ventures has a reputation of not supporting their portfolio companies. If they believe your company is not going to be a unicorn, then they will do everything in their power to force you to sell your company.
But we were desperate. 63 investors had already passed, so it was likely Donald Ventures or no one.
Honestly, I never believed that anyone would go to the steps that Donald Ventures did to block our funding. We had term sheets lined up that would have allowed us to keep going forward without any of their money. Yet Donald Ventures blocked every term sheet.
It wasn’t until we asked Silicon Valley Bank (we had a loan with them) to intercede on our behalf did Donald Ventures back down and allow the round to go through.
You need to beyond the labels when you’re looking for investors.
That’s the point my Dad was trying to drill into my thick head. It’s not about the investor that has made it onto some mythic list. It is about the investor that’s right for you.
For example, I remember telling Gill I wanted to get a loan from SVB because it would extend our runway before we raised our next round of funding. Gill didn’t like the idea, but he said, “I will support you.”
That’s what you want. Supportive investors. You want investors that aren’t likely going to run for the exits at the first sign of trouble. You want investors that are going to disagree with you and still support your decisions like Gill did with me.
Everybody’s money is green. Finding supportive investors, regardless of whether they are considered Tier 1 or not, gives you the best chance of your startup succeeding.
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