How do founders of encryption projects choose the right VC?

Choosing the right VC cannot "make" a company, but it can increase the company's chances of success.

Written by: Alana Levin, Variant Investment Partner

Compiled by: Luffy, Foresight News

Just as VCs conduct due diligence on investment projects, founders should also conduct due diligence on potential investors.

The primary goal of VC is to increase the chances of the company's success. VC can achieve this in various ways, and determining how each investor can effectively support their startup should be at the core of the founders' due diligence. From the perspective of the founders, I would filter VCs based on the following criteria.

First of all, can VC really increase the chances of project success?

Can investors provide other value besides just pure capital?

I think it's possible. Through communication with the founders, here are some of the most commonly mentioned ways VC can really help.

Brand: Gaining support from "first-tier" venture capital firms typically (at least in the short term) enhances the company's brand. This provides direct assistance in talent recruitment. The brand halo effect is somewhat less significant when recruiting the initial 10 employees, but it becomes crucial for attracting talent once the company reaches the Series A funding stage or beyond. Given that early hires have a significant impact on the company's trajectory and culture, the ideal approach for founders is to attract these talents from their own network.

A strong brand means that the agency or partner is well-known, highly respected, and regarded as a key factor in the success of the project. Success is the best brand.

Knowledge and Insight: Do investors have experiences that can be referenced, thereby providing useful advice to entrepreneurs? Are they particularly skilled at identifying factors that influence the market or business?

There are actually two points here: First, VC may accumulate relevant experience from successful companies in their portfolio (or similar experiences as founders themselves); second, they are able to provide clear insights into broader market dynamics and the potential impact these dynamics may have on companies in the next 6 to 12 months.

Networking: Sometimes VCs can help founders (or other functional heads) connect with the right people. The "right people" may include other executives with relevant experience or potential clients. Founders still need to work hard to win business; it is rare for clients to be acquired solely due to the influence of a VC. However, investors can certainly help entrepreneurs at least open some doors they want to enter.

Promotion Channels: Some VCs have their own audience, so becoming a "KOL" is part of the value they provide. This is quite evident today: many VCs are trying to establish their own promotion channels through podcasts, newsletters, X accounts, and more. Sometimes, these channels can indeed become effective means for raising awareness and driving traffic for new startups.

You have received an investment offer, what should you do next?

First of all, congratulations! You have the opportunity to choose from a range of competitive investment offers, which is both an achievement and a privilege. Take some time to enjoy the process.

You may already have some intuitive judgments about the parties you want to collaborate with. The due diligence process often reveals certain situations, such as the types of questions people ask, the insights they share throughout the process, their responsiveness in follow-ups, and whether there is a sense of cultural compatibility, among other factors.

It's time to validate this intuition. Here are the steps I will follow, in no particular order:

Conduct background checks on investors: These checks should cover successful companies in the VC portfolio, as well as those that are on the verge of or have already failed. It is important to understand what kind of partner the investor is in both successful and stressful situations. Ideally, these references are companies that have also collaborated with the investors you are considering partnering with.

Check for Conflict of Interest: Does the institution have a history of investing in competing companies? More importantly, have they invested in any companies that could theoretically compete with yours?

Consider the tenure of the partners in the organization: Typically, the choice you make is both an organization and an individual partner. I encourage more founders to inquire about the ambitions and future plans of potential partners. A relevant thought experiment is to ask yourself: If this partner were to leave tomorrow, would you still be interested in this organization?

Determine whether the institution matches the stage of your company: Whether a fund continuously invests in companies at the same stage as your company can affect the usefulness of its resources, the degree to which your company is prioritized in resource allocation, and the relevance of the advice that investors can provide. A $1 billion fund providing a $5 million seed round investment accounts for only 0.5% of its total allocation. Frankly, if a fund invests $50 million to $100 million in later-stage companies, it becomes more difficult for earlier-stage companies to gain the institution's attention and assistance internally.

Understanding the Institution's Perspective on Exits: This may sound a bit strange. However, in an era where IPOs are becoming increasingly rare, understanding investors' views on acquisitions or the sale of secondary equity can help you avoid a lot of trouble in the future. Similarly, in the cryptocurrency space, understanding investors' views on the sale of tokens is a useful reference factor for token design and launch strategies.

Choosing a partner is often a "one-way street." Selecting the right VC can never "make" a company, but it can increase the chances of success for the company and at least make the founders' days a bit easier. Spending a few extra days conducting due diligence on potential investors may pay off in the long run.