Since covid hit the US six months ago VCs and entrepreneurs worldwide have had to adapt to the new reality of doing deals without meeting in person. Building trust is the challenge — both sides must believe in each other — and it becomes even more critical at the early-stage where there are less proof points around the business. In this time period practically every panel I have served on has had questions around this process. And I was surprised to find many (most?) entrepreneurs and VCs express skepticism while I felt very comfortable with virtual-only investments.
I did my first investment without meeting the management team in person in 2015 in self-driving car startup nuTonomy. It was incidentally also the biggest exit I have had by many metrics because my seed investment got sold two years later for $450M. At Tau all our new investments this year have been without meeting the team in person. In two cases we had met the CEO at some point in the past but in the latest deal we had never known anyone from the management team ever.
We obviously all want to go back to meeting in person but that may not happen for a while — at Tau we think the pandemic will most likely run its course similar to 1918 i.e. 2-3 years. So in the meantime this article is about sharing our 5 guiding principles in hopes they may be helpful to others.
1) Warm Intros — Getting a warm intro is almost always the best option for an entrepreneur because it provides social proofing, in pandemic times even more so. When we look at our deals this year, intros from other VCs were critical in all of them. In the first case a VC who wasn’t investing gave us a tip, we reached out to another one who was and got introduced through them. In the second case we knew the entrepreneur, committed to investing, and brought in a larger investor to lead. In the third case another VC who ended up not investing was the one who introduced us. Entrepreneurs should be aware that deal exchange between investors is a very established practice, in my case actually the single biggest channel in terms of number of deals over the years.
2) Decks Upfront — Many if not most investors ask entrepreneurs to share a deck upfront before the first conversation. We do the same since it allows us to cover more ground beforehand and spend the valuable meeting time on topics that are harder to discuss in asynchronous communication. Oftentimes we will do a first meeting of half an hour to explicitly know the team and qualify whether and how it makes sense to go deeper. The natural hesitation for entrepreneurs is that sharing their decks might kill their chances of a meeting or that their confidential information might leak. As former entrepreneurs, at Tau doing the right thing for the entrepreneur is our north star and we do not share materials without the entrepreneur’s consent. That said, what we do recommend is having a shorter intro deck that is very much shareable upfront and a longer deck that can be shared once there is more mutual trust.
3) Parallel Questions — We believe how we ask is as important as who we ask as a reference. We believe in what we call parallel questions, i.e. ways of understanding a person by asking to choose between options. Instead of asking what someone would do, we will ask if they would prefer doing A versus B. Instead of asking who they would partner with, we will give very specific options and ask to explain the reasons. Specificity is key since we can then understand truly the choices they are making for the business rather than staying at too high level with generalized statements. We absolutely encourage entrepreneurs to do the same when trying to define how the VC operates.
4) Zooming With The Whole Management Team — Almost always we will suggest a call, often just half an hour, with all the key members beyond the CEO. We believe it’s absolutely good practice for the management team to also put a face to a name if they end up working with an investor. To avoid being a recitation of publicly available facts we make sure to know the team’s biographies, starting from their LinkedIns, and actually ask more specific questions around their journey especially in starting and running the company.
5) Coinvestors — Having invested across my career across the spectrum, my maxim is early-stage: collaboration :: late-stage: competition. At the seed typically two-three VC firms work together to help a startup. As a company grows the investment dynamics turn more competitive since investors will have stricter mandates around ownership and try to have a larger piece of equity. All that said, if we are not the lead investors in a deal we invariably like to get to know them. It’s a win-win overall because the other firm may very well be a coinvestor in other deals, in fact VCs will tell you most of their longest standing collaborations stem from having served on boards together while working at different firms. We recommend entrepreneurs to always offer an introduction to their lead investor (or co-leads in some cases) once another firm is in deep diligence, it will very likely than not help strengthen the conviction around the investment.
Originally published on “Data Driven Investor,” am happy to syndicate on other platforms. I am the Managing Partner and Cofounder of Tau Ventures with 20 years in Silicon Valley across corporates, own startup, and VC funds. These are purposely short articles focused on practical insights (I call it gl;dr — good length; did read). Many of my writings are at https://www.linkedin.com/in/amgarg/detail/recent-activity/posts and I would be stoked if they get people interested enough in a topic to explore in further depth. If this article had useful insights for you comment away and/or give a like on the article and on the Tau Ventures’ LinkedIn page, with due thanks for supporting our work. All opinions expressed here are my own.
