How is VC financing affecting your startup’s go-to-market strategy?

Many startups choose to take the Venture Capital route for several reasons. One of the rationales is that venture capitalists are often investors who are actively involved in the companies they finance and therefore can offer a great deal of support. However, raising funding from venture capitalists also involves facets that can sometimes take time away from the founders and turn out to be inconvenient. An investment from a venture capital firm involves the establishment of a partnership. Therefore, significant business decisions tend to be made jointly with the investors.

 

One of the business decisions most often made in conjunction with investors revolves around the Go-To-Market srategy. Naturally, the decision depends on the type of product, the level of competition in the market, the degree of complexity and length of the sale cycle, as well as other parameters.

 

In this context, a fundamental and interesting question often arises for founders – when and at what level of maturity should a venture enter the market? How do we balance between going to market with a sufficiently mature and interesting product and with the need for customer feedback during product development? To what extent does the time to market depend on the type and distinctiveness of the investors? On the one hand, venture capitalists are known for their patience and allow teams to invest the time required in the R&D stages, but on the other hand, venture capital firms help entrepreneurs focus on the more important things and therefore, bring the product to market faster. Due to the competing effects, the answer to these questions is noteworthy and may have practical implications.

 

To shed some light on the subject, in an article by Thomas Hellman and Manju Puri, two researchers used a unique dataset of startup companies operating in Silicon Valley. The data collected included information from databases (private and public), individual interviews of key people in the companies and other data collected manually over several years. The information gathered allowed researchers to look at the evolution of startups according to a timeline and examine the impact of fundraising and investor distinctiveness on the time it took to develop the product and bring it to market.

 

Hellmann & Puri found that the investment of venture capital funds accelerates the time to market. In fact, companies backed by venture capital funds bring their product to market faster compared to companies funded by other types of investors (other types of funds, institutional investors and/or private investors) and the result is quantitatively significant. It has been found that a company is twice as likely to launch the product in the year after the investment is made in comparison to companies that were not funded by venture capitalists.

 

Publishing in the RFS is not an easy journey – the researchers performed numerous tests to rule out other justifications for these results, such as the industry in which the companies operate, the amount of money raised, the set-up time, etc. However, there are several interesting points that are worth considering, subsequent to these results.

 

Firstly, is it possible that venture capital firms pre-select the time point for investing in companies as one that is close to the product launch time? If so, this may be the optimal time for entrepreneurs to approach investors, and until this time, it is best to stay as lean as possible. This will help shorten the fundraising process and help the company in the long run.

 

Secondly, do venture capital firms tend to invest more in companies that build products that require fast market penetration? In this case, before embarking on a fundraising round, founders should answer this question: “How important is the time to get to market with the product we are building”? This may save valuable time and help the team understand which investors to turn to.

 

And finally, is it possible that venture capital firms are accelerating the Go-To-Market process and pushing entrepreneurs to enter the market too soon, so they can show results to their investors in a short time? In this case, it is important to build the right investor syndicate in the fundraising round, and get funding from a number of investors, so that at least one of the funds is relatively early on the timeline, in order to balance other investors who have less patience with market entry.

 

Dor Lee-Lo, PhD is the Managing Partner at IBI Tech Fund