Repeat founders who have a proven track record, good references, and in the best cases, an exit to point to will have an easy time making inroads with venture capitalists. Earlier this week, for example, the former founders of Udemy and altMBA raised more than $4 million for a startup with no name or final product.
However, broad strokes in an environment as nuanced and dynamic as VC never make sense. As early stage evolves and more capital flows into the sector, some investors actually prefer first-time founders; it all depends on the type of venture capitalist you ask.
Last week, TMV co-founder Soraya Darabi joined the Extra Crunch Live stage to discuss her firm and investment theory.
“We look for founders who have not had a demonstrable exit before because we think that it can actually taint your perspective,” Darabi said during an Extra Crunch Live. “We look for, instead, founders [who] have had a front row seat of success, or had some product experience where you’re watching from third base but not necessarily the person that takes the whole show home.”
The preference comes directly because of TMV’s investment cadence. TMV invests between $500,000 to $1.5 million into startups that have valuations below $10 million, but sometimes up to $15 million. Startups that have heavy market signals or hype will likely exceed that range, and thus become out of reach. For example, a Y Combinator company raised $16 million in a seed round at a $75 million valuation before Demo Day.
As a result, TMV sources founders who have not yet made the leap and want an institutional investor to help them start their first company.
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“That’s our favorite kind of founder and they are everywhere,” Darabi said. “Some people go to conferences to meet the next EV Williams, and I spent more time in a pre-pandemic world going to New York tech meetup to find a Ruby on Rails developer.”
It’s common for early fund managers to take higher risk on founders in the beginning, says Claire Diaz-Ortiz, a partner at Magma Partners and author.
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“Emerging fund managers or microfunds or underestimated funders need higher risk, lower valuations to hit it out the park,” she said. “Whereas a16z can do $10 million in a clubhouse-proven founder.”
The takeaway here is that if a VC prefers a first-time founder, it might be because of valuation and accessibility. McKeever Conwell, who recently launched Rarebreed Ventures, thinks that while a previous exit might make a repeat founder get “cushy” it also might help them approach business in a way that gets investors comfortable. There’s pros and cons, and Conwell thinks that “preference” over one type of founder or another might be the wrong way to phrase it.
“I think it’s more about the way the founder goes about learning and the way they approach their business,” he said. “The entrepreneurial mindset is what’s most important, not so much whether they’re a repeat founder or not.”
For the rest of Darabi’s chat, click the link down below to take notes and hear her broader thoughts on early-stage startups:
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