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In a 2016 commentary, investor Soma Somasegar distilled five lessons from his first 100 days at venture firm Madrona Venture Group: venture capital can demand a different scale of outcome than angel investing; founders and investors need mutual fit; valuation is only one part of the picture; fundraising should serve a business need; and a firm’s time can matter as much as its money. His advice is a useful framework for founders weighing outside capital—not a survey of current venture-fund practices.
Somasegar joined Madrona Venture Group in November 2015 after a decade of angel investing alongside a demanding role at Microsoft. In his March 15, 2016, GeekWire commentary, he contrasted occasional angel investments with the work of evaluating companies as a venture investor. These are his reflections from that transition, not universal rules or a description of Madrona’s current terms.
1. Angel and venture investors may need different outcomes
Both kinds of investors can assess a team, an idea, the ability to execute, and the size of the addressable market. But their return objectives may differ. Somasegar explains that a venture fund may need investments capable of returning hundreds of millions of dollars to its investors. By contrast, he says, a $50 million exit could be exciting for an angel investor but may not move the dial for a venture fund.
Those figures are Somasegar’s illustrations, not industry statistics. The practical point for a founder is that a company can be a viable business yet not fit a fund’s return expectations. Before seeking VC, ask whether the business’s plausible growth and exit paths align with the scale the prospective fund needs.
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2. Fit runs in both directions
Not every startup is suited to venture funding, and not every VC is suited to every startup. Founders should consider what they want their business to become and what outside capital could mean for control and growth. If the priority is to retain sole control, grow organically, or remain small, a VC-backed path may not fit those aims.
Somasegar describes early-stage VC funding as a long-term relationship. Capital is only part of it: founders and investors need trust, an aligned vision, and the ability to work through disagreements respectfully. A founder is choosing a partner as well as accepting financing.
3. Consider valuation alongside the company’s progress
Somasegar calls valuation “an art, not a science” and cautions against treating it as the whole assessment. He points to several other factors investors may weigh:
- Whether the product is still being developed or is already in the market.
- Customer engagement and evidence of traction.
- Usage and adoption.
- Revenue.
- The founders’ track record.
His related reminder is that “100 percent of zero is still zero and likewise a smaller percentage of a ginormous pie is still very meaningful.” The point is not to ignore dilution or accept any price. Rather, compare the ownership offered with the company’s progress, the capital’s potential effect, and the value of the partnership.
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4. Raise money for a business reason, and choose the partner deliberately
Somasegar offers no fixed formula for when to raise, how much to raise, or what valuation to seek. His rule of thumb is: “If the trajectory of the business is going to be significantly better with additional cash, by all means go raise the money.” That puts the decision on the business plan: identify what the capital would enable and how that would improve the company’s path.
He also urges founders to look beyond the amount of money. A financing partner may contribute strategy, connections, mentorship, and accessibility. When comparing prospective investors, consider which of those forms of support are relevant to your needs, as well as whether you trust the people and share a vision for the company.
Independent reader supportYour contribution helps us test, update, and keep practical guides available for everyone.5. A firm’s time matters alongside its capital
The size of an investment does not necessarily determine how much attention a firm can give a company. To illustrate the allocation question, Somasegar describes a hypothetical situation: a company has $500,000 available in a round, while a firm usually invests $2 million to $3 million per company. In that scenario, the smaller opening may not match the firm’s usual investment approach.
Those amounts are part of his example, not market-wide benchmarks. The founder’s useful question is whether the opportunity fits the firm’s investment approach and whether the firm would be able and willing to contribute meaningful time. Discuss expectations for involvement directly rather than assuming that any check size guarantees a particular level of support.
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Putting the five lessons to work
Before choosing a VC-backed path or accepting an offer, founders can use Somasegar’s framework to test the decision:
- Outcome: Does the business have a plausible path to the scale this kind of fund needs?
- Company direction: Does outside capital fit your preferences for control, growth, and the company’s eventual size?
- Progress and price: Are you evaluating valuation alongside product status, traction, usage, revenue, and founder experience?
- Purpose: Can you explain what the money will enable and why it should materially improve the business trajectory?
- Partner: Do you trust the investor, align on direction, and have a realistic understanding of the firm’s time and support?
The original commentary appeared in GeekWire on March 15, 2016. Somasegar also published a matching version on Medium on March 16, 2016, identifying GeekWire as the original publisher.
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