Entrepreneurs are often so focused on trying to “close the deal” with the VC – and always try so hard to answer any questions posed by the VC – that they forget to ask the VC any questions!
Here are 12 questions founders should ask potential investors more often:
1. Is there a CAPITAL DEPOSIT?
You want to start your fundraising process by finding a lead investor. If a certain VC refuses to take the lead, keep talking to them, but at the same time make it a priority to find another partner who is a better fit. Many fundraising processes were abandoned because the founders could not find primary investors.
It’s easy to find dozens of companies that want to fill a round, but most will want someone else to take the lead first. A lot of founders only discover this fact after having conducted more than 3 meetings for negotiation – this is a HUGE waste of time.
2. HOW MUCH % OF THE FUNDS IS THIS INVESTMENT?
In general, the larger the percentage, the better – that means the VC has more “flesh in the game”. Keep in mind, the larger the number, the more closely investors will monitor your progress!
3. DO YOU STAY ON THE BOARD OF DIRECTORS?
Here’s another question that gauges how important VCs are to your startup. Financial capital is easier to obtain and deploy, it is the reputation capital and time of VCs that are the real currency in today’s venture capital market.
4. HOW MUCH BETWEEN THE INITIAL AND CONTINUOUS INVESTMENT?
Most VCs make the initial investment and “reserve” the funds to maintain their ownership in future rounds or to help a struggling startup in need of cash.
This reserve is often described as a ratio, for example. 4:1. So if a VC invests $1 million in your #Seed round, they theoretically have $4 million available for your future rounds. But don’t be sure that they will, especially if you have a rough start…
5. HOW MUCH ONE TIME DO YOU INVEST IN THE NEXT?
VCs are not lifecycle funds, but they always make small investments in the startup’s next round of valuation to signal their support for the venture capital market. However, most funds make individual decisions about the companies in their portfolio, and that can create “signaling risk” for startups.
6. HAS VC LED ANY NEXT INVESTMENTS?
One benefit of having ample reserves is that VCs can “bridge you” if you don’t achieve breakout growth. However, some companies have policies against this, which also negates the benefit of a large reserve fund for your startup.
7. WHAT ARE THE FUTURE REPORTING REQUIREMENTS?
You should set expectations for the communication process from the start – some VCs like to visit you quarterly. Others may want you to stay updated by presenting at the annual partnership meeting.
8. DO WE COMMUNICATE WITH ANYONE ELSE ON THE TEAM?
Some VCs will introduce you in CEO forums, introduce you to cross-functional teams of experts, and cover all your needs. Others will write checks and dig until things start to work out.
9. HOW does the VC handle POTENTIAL COMPETITIVE SITUATIONS?
Ask VCs how to share information in their portfolio. What if a company appears to be #pitching for them or they receive a pitch deck from a competitor to your startup – what is their policy on how to handle these situations?
10. VALUATION ROUND OR CONVERTIBLE LOAN
Each VC has a different preference. Today, most VCs will participate in both a valuation round and a convertible loan, depending on the situation. Find out which will happen and they will usually also ask for a side agreement.
A sub-agreement that enacts simple agreements on future equity. The sub-agreement includes a number of rights that are sometimes granted exclusively to investors, such as the right of first preference (or right of way), the “Major Investor” right, the right to reimburse expenses, the right to information, and observer rights.
11. HOW IS THE STARTUP ASSESSMENT PROCESS?
Each company has different standards, but generally, you should expect them to ask for references and access to a company’s financial and operating data. The later the funding round, the more detailed you should expect them to do.
12. HOW MUCH IS THIS INVESTMENT IN THE FUND?
This is a good question to ask if this VC is a new fund or outside of the traditional VC circle. It would be helpful to know if your potential VC will be around for the next few years. This is less of a concern with established funds.
This is not an exhaustive list. Of course, you want to ensure that you and your investors see firsthand the core aspects of your business, the product roadmap, the speed at which you plan to deploy capital, and so on.
A few more notes:
HISTORY IS BETTER THAN THEORY
It’s easy to talk about what you’re going to do; It’s more impactful to talk about what you’ve done. Be suspicious if reputable investors answer your questions abstractly rather than with concrete examples.
Don’t ask all of these questions in your first meeting. “Are you in the lead?” is the only question you should definitely ask first; The rest should be through email and meetings Monday and Tuesday when you feel interested.
DON’T JUST ASK VC
Do your own due diligence on the VC. Get in touch with founders that VC backs have been successful and, more importantly, those that have not! This is too big of a commitment to entrust completely to your intuition!