Considerations and questions to help you assess the venture firm and their fit with your business?
- Do they have expertise in your space? If they don’t and don’t know anyone who can really be helpful – they’re bluffing.
- Do they ask you hard/good questions? If they don’t, but prefer to pontificate and give their uninformed opinion, they are bluffing.
- How much ownership/capital do they need to put to work to justify their involvement? If they need to own 30-50% and put $15-30m to work, and you only need $5m to get to break-even – don’t kid each other, they are bluffing.
- Do they have a slot? If they sit on 10-12 boards, have a backlog of deals waiting for exits and really don’t have a slot to devote to your deal – they are bluffing.
- How do they view your early investors/angels? Likely your angel investors took a lot of the early risk and have provided a lot of value to get you to this point – if their firm philosophy is to limit their involvement and crush their ownership position, maybe not a great fit.
- Board style. You probably did this because you are an entrepreneur, think you’re pretty good at predicting the future and are comfortable taking risks to change the world. If their deal structure or board style will make you feel like an employee and not an owner, probably not a great fit.
- If they don’t think you’re the right guy to be CEO – do they tell you why, what they’re looking for, and when they think is the right time to make the change. If it’s thoughtful – respect them for your directness. If they want to make the change before they put the money in, perhaps it’s not the right deal for you.
What is the firms typical round; Seed or Series A? Is the seed really a seed, or is it just a reservation at the table and they need to put $10-20m to work?
Ask early on, “Will you lead? Many will be glad to follow and wait for someone else to do the work. That’s a no.
What do VCs look for:
- Is it an awesome management team. Do they have the right skills/experience for this market and the product fit?
- Is the space/market substantial enough to build a big company and provide a desired return.
- Is the product/distribution/monetization approach compelling?
- What’s the competitive landscape look like? Can you build a sustainable, differentiated offering?
Beware of vc’s hedging.
Understand the difference between “theme based” vs. “opportunity” investors.
Slow is fast. How does slower investment effect your valuation? An important balance.
- Upside – If you develop proof and hit your milestones – improved valuation
- Downside of slower stage could be your deal is not enough to achieve your goals.
- If you did not achieve your goal it is important to ask yourself why and be pragmatic.
- If you have to do a down round, your cap chart will get ugly