Young software companies seeking growth capital typically look at investor track record as a variable to consider when determining funding source. Track record is important, however, it is important for reasons that may not be so obvious.
New fund managers generally aspire to become highly experienced fund managers. To do so, they must perform at levels attractive to their LPs so as to inspire investment in the next fund and the one after that, etc. LPs are not committed to successive funds and have a wide range of alternatives.
Over the years, we have had deals that required (unexpectedly) multiple rounds of capital (i.e. things were not going according to plan – yes I know, “..you don’t say?”). We have been fortunate enough that many unexpected bets incrementally committed through visceral conviction had positive outcomes allowing us to become “experienced fund managers.” Sometimes these positive outcomes occurred for reasons we never saw coming.
When a market suddenly becomes populated with funds promoting the same investment strategy this is when companies seeking funding need to contemplate track record. Why? Because new fund managers want to become experienced fund managers and to do so, they likely have to beat the competition and at significant levels. So what?
“So what?” needs to be contemplated in the context of the following question…”What if you (i.e. young software company) are a late bloomer?” This is the question because it impacts how you may be treated by new fund manager hoping to become experienced fund manager. If you are a late bloomer and other companies in the new fund are not-so-late-bloomers, you have just became a lower priority for incremental capital (which, admittedly, you may or may not need). If you do “need”, you just got squeezed into material financing risk and life just became incredibly complicated. This is so because the inability or unwillingness of your initial capital source to play along significantly is read by potential third-party sources of cash as a sell signal (i.e. they must know something we don’t know). Doesn’t matter what you heard during initial courtship about the long road together, this is the reality of fund management world.