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If you, like me, regrettably couldn’t stay off social media during the holidays, you may have seen a debate pop up among VC tweeters that seems to surface every year: why you should never raise from anyone but so-called Tier 1 VCs — or those whose returns and reputation is top-notch.
The debate this time kicked off on X after Ian Crosby, the cofounder and former CEO of US accounting startup Bench, posted about how his company was being shut down years after he says he was removed as CEO in 2021 (he claimed his board wanted to replace him with a professional CEO). Tech journalist Eric Newcomer posted a screenshot of the company’s board members, prompting one founder to declare on X: “Never raise money from Tier 3 VCs. Every horror story I hear is from uncalibrated VCs that have no operating experience who think they can tell a founder how to run their company.”
That led to a maelstrom of contradicting opinions being shared: “IMO this is terrible advice,” wrote one respondent. “Not all founders can raise from what you consider Tier 1 or 2”; and “who is on the cap table is just one of many factors affecting company outcomes.”
The VC world loves a bit of infighting, but it got me thinking: when it comes to picking VCs for a startup’s cap table and, more importantly, a board, how much should founders consider a VC firm’s status? And what are the practical implications of choosing a Tier 1 versus a Tier 3 firm?
“There’s a lot of VCs who are really amazing performers that don’t even have a website other than a landing page, right? There’s no formula, there’s no secret recipe,” Paris-based VC Michael Jackson tells me.
Pragmatically, he’s blunt: If your startup really needs to raise, “beggars can’t be choosers, right?” But it’s more than that — he points out that there are lots of companies which didn’t get Tier 1 VCs on their cap tables until Series B or C, and “started out with relatively mediocre VCs, and they ended up still succeeding.”
“I think, more and more, it depends on the individual partners, and less and less on the actual firm,” says Jackson — especially as the VC market is increasingly stratifying into mega funds and more emerging-manager types.
Of course, founders all want Tier 1s — and for good reason. “I think a stamp of approval from a Tier 1 firm can actually be very, very useful, because it kind of decreases the perceived riskiness of the business and the perceived chances of this really being a massive success,” Berlin-based Gloria Bäuerlein, who launched her solo GP fund Puzzle Ventures in 2023 with €21.5m, tells me. Tapping into the network from Tier 1s can be lucrative.
However if a founder is more inexperienced and is still trying to figure out product-market fit, or perhaps doesn’t have imminent big plans to expand to the US and hire like crazy, there “is not a lot of benefit, to be honest, getting that brand name” she says.
The pitfalls of Tier 1s
Tier 1 VCs have their disadvantages, too — which could be where emerging managers or younger VCs can find a way in. One of those drawbacks is Tier 1 VCs juggling their board seats. “A lot of those board seats are more important than you are at this point,” Bäuerlein says of early-stage companies in particular. She adds that Tier 1 VCs may also be less patient with founders in those earlier stages, and “they might drop you a little bit more quickly than a Tier 2 or Tier 3 fund” if things aren’t panning out.
Jackson tells me: “There was always shit behaviour from some partners” at Tier 1 firms. “That’s not going to stop because of the brand.” He says he’s seen boards where Tier 1 VCs wouldn’t show up for meetings or calls.
Pros of Tier 3s (or emerging managers)
The advantage of emerging managers, according to Jackson, is they tend to be more specialised, and “they are hungry, they will bust their ass, they will work harder.”
Jackson believes it’s better to swap the term “Tier 3” with “emerging manager”; Bäuerlein views “Tier 3” VCs as family offices or corporates who don’t have much experience or commitment to the VC asset class and should likely be avoided. (Readers, I’d like to know what you think: how do you define “Tier 3” VCs?)
Founders also need to do their own due diligence on the partner and the firm, and who you’re dealing with matters as well as the firm you’re getting the cheque from. “There shouldn’t be too much discrepancy between the quality of the partner and the quality of the firm,” says Bäuerlein. There’s always the risk you’ll lose a partner — particularly if they’re more junior — and be stuck dealing with the broader firm.
As Jackson and Bäuerlein point out, who is on the board is more important than who is on the cap table — and Jackson suggests founders really shouldn’t have more than two VCs in the boardroom.
Bäuerlein says a good VC board member should be able to deal with the rollercoaster of emotions founders experience: “The ideal board member is not making those ups and downs more extreme, but trying to balance them out,” she says. “When you’re stressing out as a founder, you don’t want someone on the board who stresses you out even more.”
I’m curious to hear from you, VCs: what advice do you give to your startups about picking VCs and board members? Do you have any horror stories about Tier 1 or Tier 3 VC behaviour? Are the terms “Tier 1” and “Tier 3” even all that helpful or indicative of what you get out of the relationship? What else is missing from this conversation? I’m all ears.
Read the orginal article: https://sifted.eu/articles/tier-1-vc-raise/
