Power is like being a lady… if you have to tell people you are, you aren’t. – Margaret Thatcher
Founders are sometimes faced by the question whether they should choose to raise capital from a less “powerful” (you can also insert famous, prestigious, influential, etc. here; you get the idea…) VC fund, when they have a term sheet from a top tier fund. This, obviously, implies that the term sheet from the top-tier fund is somehow inferior in its terms.
In trying to answer this question, let’s first try to define what top-tier means. I think the Thatcher quote above is quite enlightening for the power hierarchy in the VC world. There are old, established firms with multiple fund generations, firms with quasi-celebrity partners, firms with huge hits in their portfolio, firms with massive AUM and firms with a history of high returns. Each of these groups would be likely to argue that its the characteristics they possess that define a top-tier firm. The important thing is that people largely tend to be in agreement about who the top-tier is.
On to our question… I think the – perhaps frustrating – answer is that it depends. The team should make their decision based on many factors. One very important aspect is who specifically you are dealing with. I think VC firms matter a lot less than the individuals you end up working with. Do you trust them? What do their other portfolio companies say about them? Do you feel they understand your company? Please don’t underestimate how important chemistry is in partnerships.
Another critical factor is what you need the most to get to your next milestone. Your ideal investors, from stage to stage will vary. You may value a geography-focused investor to help you with your new market, or a sector specialist to help you tackle certain problems.
In short, there certainly is a hierarchy of investors, but it changes from company to company, and from round to round. Just like it’s dangerous for VCs to go logo hunting for their portfolios, it’s usually wrong for the startups to do the same.