The Best Startup in a VC's Consideration Set

What Else Are You Being Compared To?

At one time, I was discussing a fundraising round with a startup founder. Several days later, I called up an investor that Tundra Angels co-invests with. I knew that the same startup founder was also discussing their round with this firm. Coincidentally, this firm was also considering another company that Tundra Angels was currently in due diligence with.

On the call, the investor and I started comparing these two startup opportunities. Essentially, we went back and forth weighing the variables of the two different startups at that snapshot in time - market size, exit opportunity, traction, fundraise terms, etc. (I cover 13 variables that we look at when Tundra Angels invests in startups in this article).

Specific to fundraise terms, one of the startups was currently raising on a uncapped SAFE agreement with hardly anything committed to their round, and the other startup had a term sheet in place for an equity round with 50% of their round committed. The investor commented that between the two opportunities, the uncapped SAFE note was far less attractive than the other startup’s priced equity round with 50% committed.

As we were comparing the two, this investor said something astute, which was the inspiration for writing this article. He said,

“When founders are fundraising, they don’t think about what they are being compared to. They don’t realize the investor’s consideration set and the other startups that are fundraising at the same time.”

That’s so well put.

Let me get real on this. This investor and I were comparing two completely different startups, in completely different markets, with different products, executing on the future of two completely different industries. This was not an apples-to-apples comparison, such as a comparison of two different competitive startups in the same market. This was akin to an apple to cucumber comparison!

Metaphorically, venture capital investing is like this.

It is like an investor is standing on the bank of a flowing river, and they are watching startup opportunities float by. And as they float by, the investor is trying to decide if they will reach out and grab it because they don’t know when it goes downstream it will be available later.

So, back to my conversation with this investor, the comparison was logical and natural because both startup opportunities were, to the analogy, floating down the river at the same snapshot in time. Thus, regardless of the differences in the companies, they were part of our consideration set.

I cannot emphasize how important this dynamic of the “snapshot in time” is in venture capital. As I reflect on this…

✅ There are three dynamics that are all contextual to the snapshot in time that VCs are always thinking about:

1. The snapshot in time of that startup’s trajectory

2. The snapshot in time of what else the investor is considering at that moment.

3. The snapshot in time of the limited capital that can be deployed 

And underneath all this, there is a transience to the snapshot in time that the deal may never be available again. ✅

These three fleeting dynamics of the snapshot in time are like notes of a chord. I use a music analogy intentionally because in order to make a decision to invest, those three dynamics must be playing in three part harmony.

The Startup’s Trajectory

The startup’s trajectory at that snapshot in time largely determines the investor’s next steps.

The variables of the startup that are relevant to the snapshot in time tend to be current traction, whether the startup is fundraising or not, and if they are fundraising, the commitments on the round.

At one point, I was interacting with a startup that was raising a couple hundred thousand in a pre-seed round. The startup had very intriguing underlying technology. And yet, the GTM strategy was still fuzzy. There was a B2C motion, and there were two B2B2C options that would target different customer segments. Each GTM strategy represents a different use case of the problem and different pricing, etc. In this case, I passed on the startup because the startup was still mid-stream in determining their path to market and their ultimate customer. But give this startup six months, and it would be a different snapshot in time with a different traction story. But, there was no guarantee that the startup would be fundraising at that time and, even if they were, there surely was no way we’d get in at the current pricing of the round! The changing snapshot in time would change the opportunity.

In another example, a contact introduced me to the founder of a startup that was growing rapidly. I got on a Zoom call with the founder. The company was adding revenue at a nice clip and building a name for themselves in their market.

The founder told me that they were raising a round of capital but was still early in the process and did not have a lead investor yet. Tundra Angels does not lead funding rounds, so I offered to introduce the founder to a VC that was strategic to the space of this startup and did lead funding rounds. My aim was that this firm would see value and offer to lead the round. The meeting happened, and later on I followed up with the founder, who said,

“We got an offer from a VC but passed due to valuation. We are growing well and are now are getting offers from strategics.”

Another reality of the snapshot in time is that a fundraise may be closed when you’d like it to be open. If can be the best company in the world, but if the startup isn’t fundraising, then the investor is out of luck.

Tundra Angels has a quarterly pitch meeting process. As I am having conversations with founders and selecting the startups to pitch, I know that I am interacting with those founders who are fundraising at that snapshot in time.

But, the timing of startup’s fundraises sometimes do not line up with our quarterly pitch meeting. There have been a handful of times when a hot deal crosses our path and we are two months away from the next pitch meeting and it cannot wait. In these moments when we see a near-irresistible deal, we schedule a virtual pitch with that founder to see the opportunity, take interest, and run our process.

Hence, because of the snapshot in time of a startup’s fundraise, we may need to adjust our process to pursue a hot deal, not the startup conforming to our process.

Otherwise, we risk the opportunity floating downstream to perhaps never be seen again.

An investor’s decision to invest will always have unwritten asterisk, “….Based on what we know and see at this snapshot in time.”

The Investor’s Consideration Set

The investor’s consideration set at that snapshot in time also affects investment decisions.

But here is the kicker for investors. In the stock market, I see the consideration set. I know what stocks I can buy. Importantly, all investors in the stock market have the same consideration set. It largely depends on the price.

But in venture capital, which is highly fragmented and inefficient, none of the investors have the same consideration set.

Each investor has their own consideration set.

When I do calls with investors and we share deals, often times I throw out 2-3 deals that they are not aware of and visa versa. It’s because an investor’s consideration set is unique to them.

✅ It may sound simple to say, but investors can only invest in what they are aware of. ✅

And here is something crazy.

It’s tempting to think, “But we are the best company in our market! What gives with this investor and their pass decision?”

In writing this, I realized something profound that founders need to understand.

✅ If a VC invests in your company, it’s not because they think you are the best company in the market.

It’s because they think that you are the best company in their consideration set, of the companies that they are aware of, at that snapshot in time. ✅

Much of the latter, founders do not have control over.

So they might not know how to compare your company versus another in your market because they don’t know others in your market. But, just as the first story that I shared, investors can only make comparisons, and subsequent decisions, on the startups that they are aware of. That’s why snapshot in time of an investor’s consideration set matters.

In other words, it might not be you. It might be them.

The Capital Constraints

Then, let’s add another layer to this. VCs also have differing capital constraints at a given snapshot in time.

The investor has raised a certain amount of capital for their fund. Their fund has a time frame to deploy that capital. They also have a percentage allocated to new opportunities versus follow on portfolio opportunities. All of this means that they look at opportunities from a snapshot of time of the capital constraints and where those dollars are best allocated. Or, they might be in between funds and are raising the next fund to invest in more startups so cannot deploy at all.

The snapshot in time of capital constraints means that not every great startup opportunity can be pursued.

A recent example is from Gripp, Tundra Angels’ 21st portfolio company. (See link here of Why Tundra Angels Invested in Gripp)

In my conversations with Tracey Wiedmeyer and Jenkin Lee from Gripp, I realize that a particular investor that would be a great fit for Gripp’s funding round. I passed along the deck to this investor, this investor opt’d in for an intro, and Tracey and this investor ended up speaking several times. I had a follow up chat with this investor to get their thoughts on the company. This investor told me on the call that they had shifted their investment strategy recently to invest in later stage companies, and yet they were going to evaluate it thoroughly.

In the end, the firm ended up passing on Gripp. Yet, this investor told me via email,

“The big factor was the early nature of the business and our desire to work downstream with slightly later stage companies. If it were a year ago, we would not have hesitated as I think Tracey is the kind of founder we want to back.”

This investor’s comment is a perfect example of the snapshot in time aspect of the capital constraints.

Were this a year ago, it would have been a no-hesitation investment!

But at this snapshot in time, their firm was at a point where they had shifted strategies and were deploying capital against that strategy.

Because of the snapshot of time of capital constraints, not all great opportunities can be pursued.

Never Be Available Again

But lastly, add to these three dynamics one foundational truth - that this company may never be available again after this snapshot in time. The startup opportunity floats downstream down the proverbial river of deal flow, never to be accessible again by that investor.

I heard a story once from Mike Maples Jr. from Floodgate VC on his Starting Greatness podcast. On one of the episodes, Mike casually makes a fascinating comment to the person that he is interviewing. In the late 2000s, one of his investor friends from Canada reached out to him. The investor said, “Mike, I know that you and Floodgate do seed stage deals. I have a startup that is raising their Series A. I know it’s a bit later than you typically invest but I wanted to at least mention it. The startup’s name is Shopify.” 

After sharing that, Mike started bemoaning to his interviewee, “I should have had the presence of mind to take that pitch. But I passed because it was a later stage than we typically do. So, I passed on the intro.” 

There is a transience to the snapshot in time that the deal may never be available again.

Closing Thoughts

Back to the initial story.

Two months after my conversations with the founder that was raising on an uncapped SAFE, the founder moved to put a valuation cap on the SAFE - now a much more attractive deal.

But, now the investors who had considered the startup two months ago were at a different snapshot in time. Their consideration set of the startups that they were aware of and interested in had changed. And the investors had just made two investments so capital was more picky. So, the founder got a pretty chilly response from those investors.

The unwritten asterisk of VC investing is that one of the major constraints in investment decisions is the snapshot in time.

1. The snapshot in time of that startup’s trajectory

2. The snapshot in time of what else the investor is considering at that moment.

3. The snapshot in time of the limited capital that can be deployed

And underneath all this, there is a transience to the snapshot in time that the deal may never be available again.

Founders should understand there is way more factoring into the decision making process that just whether or not you are the best startup in your market.

It’s really about being the best company in their consideration set, of the companies that they are aware of, at that snapshot in time.

Unfortunately, you cannot control what else is in an investor’s consideration set.

But with strong investor outreach, you can control the consideration sets that you are a part of.

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