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Entrepreneurs are often so fixated on “getting to yes” with a VC – and will go to great lengths to answer any question posed to do so – that they forget to ask the VC any questions.
Here are 12 questions that founders should ask potential investors more frequently:
1/19
Here are 12 questions that founders should ask potential investors more frequently:
1/19
Do you lead?You want to start your process by finding a lead investor. If a given fund doesn’t lead deals, keep talking to them, but prioritize finding a partner who will. Many processes die because founders can’t find a lead funder.
2/19
I can’t stress this enough. It’s easy to find a dozen firms that want to fill out a round, but most will want someone else to lead first. A lot of founders will get 3+ meetings into a process before discovering this fact – a HUGE waste of time.
3/19
3/19
What % of the fund is this investment?Generally, the more significant the percentage the better – it means the VC has more “skin in the game.”
Caveat emptor, the bigger the number, the more closely the investor will be tracking your progress!
4/19
Do you typically take board seats?This is another question that gauges how seriously the VC is taking your company. Financial capital is easy to come by and easier to deploy – reputational capital and VC time are the real currency in today’s venture market.
5/19
How much is reserved for “primary” vs. “follow-on?”Most VCs make an initial investment and “reserve” funds to maintain their ownership in future rounds, or to help a struggling startup that needs cash. These reserves are usually described as a ratio, eg. 4:1.
6/19
So if a VC invested $1M into your seed round, they theoretically have $4M earmarked for your future rounds. But don’t assume that they will, especially if you have a rocky start...
7/19
7/19
How often do they “follow-on?”FC is not a life-cycle fund, but we always make a small investment in the next priced round to signal our support to other VCs. Most firms make individual decisions about companies and that can create “signaling risk” for startups.
8/19
Have you led follow-on investments?One benefit of having ample reserves is that VCs can “bridge you” if you’ve not achieved breakout growth. However, some firms have policies against doing this, which also negates the benefit, to you, of the fund having big reserves.
9/19
What are the reporting requirements going forward?It’s good to set expectations about communications expectations at the start – some VCs are good with quarterly check-ins. Others will want you to make formal presentations to the partnership annually.
10/19
Will we interact with anyone else on the team?Some firms will ensconce you in CEO forums, introduce you to cross-functional teams of specialists, and cater to your every need. Others will write the check and ghost until things start going well.
11/19
How do you handle potentially competitive situations?Ask the VC their practice for sharing information within the portfolio. What if a seemingly competitive company pitches or they receive a pitch deck - what’s their policy on how to handle these situations?
12/19
Notes vs. Price roundsEvery VCs has a different preference. Today, most VCs will do both priced rounds and notes, depending on the situation. Find out if this is the case and also whether they ordinarily ask for a side letter with information rights or other requests.
13/19
What is the diligence process like?Every firm has different standards, but generally expect them to ask for references and access to financial and operational data. The later the round, the more diligence you should expect.
14/19
How far into the fund is this investment?This is a good question to ask if the fund is new or outside of traditional VC circles. It’s helpful to know if your potential VC will be around in a few years’ time. This is less of a concern with well-established funds.
15/19
This is far from an exhaustive list. Of course, you want to make sure that you and your investors see eye-to-eye on the core aspects of the business, the product roadmap, the pace at which you plan to deploy capital, and so on.
A couple more notes:
16/19
A couple more notes:
16/19
History is better than theoryIt’s easy to talk about what you’d do; it’s more impactful to talk about what you’ve done. Be suspicious if established investors answer your questions abstractly instead of with concrete examples that demonstrate a track record of ethics.
17/19
Be judiciousDon’t ask all of these questions in your first meeting. “Do you lead?” is the only question you should definitely ask upfront; the rest are better peppered through emails, and second and third meetings, as you get a sense of interest.
18/19
Don’t just ask the VCDo the due diligence on your VC. Call references – founders the VC backed that succeeded, and more importantly, those that didn’t! This is too big a commitment to entrust purely to your gut (or valuation!).
19/End
