How startup and scale-up investing are different

When I was leading UK scale-up Topia as CEO with fellow SSV GP Steve Black, I struggled to find venture capital investors in Europe who focused on Series B as their investment entry point. At the time, I couldn’t understand why the funds whose names I knew from prior discussions rarely led Series Bs. As I transitioned to the investor side of the table, and initially invested myself across seed, Series A, B and beyond (before focusing solely on growth), I quickly learned that early-stage venture capital investing (pre-seed, seed, Series A) and growth investing (Series B, C) are actually fundamentally different. This of course explains why firms often focus on one or the other and those who do both normally do it with different teams.

At SSV, we believe the role of a venture capital investor has four parts - sourcing potential investments, picking which investments to make, winning the investments you want to make and servicing portfolio companies after investing. You’ll often hear this talked about as “Sourcing, Picking, Winning and Servicing”.  While the stages may be the same, each of these activities is fundamentally different in early stage and growth.

First, let’s look at sourcing. Sourcing involves building a pipeline of potential investments, including finding companies, tracking them and nurturing the relationship. Early-stage sourcing generally comes from having strong relationships and reputations in local tech and entrepreneurial ecosystems, across founders, universities, incubators and angel investors. Since you’re often looking for an investment before other funds have found it, investors need to have boots on the ground with founders and get to them first.  This is why it’s so important for early-stage investors to be local to ecosystems. In growth investing, sourcing rather comes largely from early-stage venture capital funds. When a company starts to think about raising a Series B, it’s normally first a Board conversation. So you want to be the first call from the Series A investor. As such, growth investing requires building trust and maintaining relationships with venture capital investors specifically to drive referrals.

Next, let’s consider picking.  Picking involves conducting due diligence on a company to decide if the fund wants to pursue an investment.  In early stage venture capital investing, particularly at pre-seed and seed, there’s not many actual business metrics to analyze because the business is very early in its maturity. Rather, you’re generally assessing the Founders and making a bet on people with the expectation that things may completely change in the actual business going forward. I’ve heard early stage venture capital investors explain that their investment committee process was largely about proving to their partners that they had unparalleled conviction about a specific founder.  By the time you get to a Series B, there’s quite a bit of information about the actual company. There’s revenue, margins, multiples, comparables, customers, usage, ROI and more. The Founders are still critically important, but so is the due diligence on the business, plus the executive team, customers, cap table and Board. (Note that our top scale-up investments are led by Founder / CEOs who I would bet on time and again.  But, the business fundamentals also work).

What about winning the investment?  In early-stage investing, because the team is largely the founders and a few others, selecting investors is often down to the relationship with the founder and her or his decision.  In growth investing, however, there are many more cooks in the kitchen.  By the time a company gets to a Series B, there is normally at least one other investor with a Board seat and preferred voting rights that can strongly influence a funding round and the investors selected. Moreover, most Founder / CEOs have a robust executive team by the Series B and in some cases, non-executive directors also on their Boards. All of these people influence the selection of the growth investor - and a venture capital fund’s ability to win the deal.  As such, while early-stage venture capital investing is predicated on building trusting relationships with Founders, growth investing requires building relationships and trust with both the founder and a multitude of other stakeholders.

Finally, let’s look at servicing. I often tell people that the real work of venture capital starts after we invest.  But this work is quite different for early-stage and growth investing.  Servicing portfolio companies in the early stage is heavily oriented toward coaching entrepreneurs through early-stage company building, which can be challenging and lonely. Often the tactical work is about finding product-market fit and then early revenue traction. Servicing companies in the growth stage is, however, much more about driving accountability in the management team, developing governance structures and building value for shareholders - from helping with sales acceleration and international expansion decisions, to supporting business and pricing decisions that influence margins and valuation multiples.

At SSV, we decided that growth investing (or scale-up as we like to call it) is the best fit for us.   We define this as investing in a company when it has achieved material revenue traction and is at an inflection point of scaling globally.  Most often this means first investing at a Series B.

A brief note - You might previously know us as BCP Ventures. That's our first fund from our GP team. We're now Smart Society Ventures, based in Geneva and London