Hardball: The Questions You Shouldn't Be Afraid To Ask VC's

I'm now almost two years into this new phase of my career. I wish I knew as an entrepreneur what I now know as a venture capitalist (and I wished I had saved all of the email rejections I got from partners at firms...man...how frustrating was the "not a good fit for us right now" rejection!). And if I had the guts to carry my entrepreneur passport again, with all its stamps of failure on it , and was looking for some nuggets of information that might "level" the playing field and help put more transparency in the funding process, I'd start by just making sure I asked the following questions of my future venture funders.

Or at least were prepared to develop the guts to ask. Consider this my contribution to "The Funded" section on Tidbits Every Entrepreneur Should Know, if it existed in a "members-only" section of the site. It is far from a complete list, but it is a good starting point for those new to the process that I'm sure I'll add to later on after my commute.

1. Do you sit on boards? This is a crucial piece of information most entrepreneurs never ask. Honestly. Maybe 1 in 20 have asked me that. Why is that important? It is important because unless you are meeting with someone who does, you aren't meeting the right people in the firm. And while that is fine for an initial meeting or two, entrepreneurs need to know that moving a deal forward in any firm means moving to meetings with people who sit on boards. That isn't to say that those who don't aren't important. But as a general rule, until you get to someone in a partnership that does or can, you haven't made enough progress. Caveat: Some of those in firms that don't sit on boards, also have an enormous amount of clout within a firm.
2. Can you introduce me to 2 or 3 entrepreneurs you have worked with? Can you introduce me to entrepreneurs you have backed that have failed? Ok, this is a two part question, but both are important. The first question should be essential due diligence for every entrepreneur. Why don't entrepreneurs, especially in a market where good people and good deals are in short supply relative to the number of firms with a ridiculous amount of capital to deploy, ask these questions? Knowing how the partner you are meeting with interacts with other CEO's is essential. And even more essential, in my opinion, is finding out from failed venture backed CEO's, how the firm handled itself in those cases (and the partner in charge, if he's on your company). Knowing how people react in times of failure I believe is more dispositive of true character of a firm and a person than knowing how someone reacted when the company they backed was acquired by Google. And oh, by the way, the entrepreneur that has the guts to ask this question, gets extra points with me...it shows confidence. And that sells!
3. Where is the firm in its fundraising cycle/capital deployment? Again, another question I've been asked only once. Is this important? You bet your payroll this is important, because you just might be. Even before I'm contacting firms, if I'm an entrepreneur, I'm looking to see what firms from the outside, look to have dry powder in their fund. Why? Well, let's just say that from a investment professional's perspective, HEARING a great pitch without a lot of dry powder is like going to In-N-Out Burger on a no fat diet--there is no payoff! But make sure if you ask this question, that you not make the wrong conclusions. Every firm handles fundraising/low powder in different ways. Some look to invest in later stages the later on in their funds that they are, some continue to invest early, some sit quiet while awaiting first closes of their next funds. And for many funds, it isn't an issue at all. But, the point is, make sure you ask the question and consider the context around the answer. History is useful here to establish context to inform your thinking about whether there is a fit or not.
4. What does the funding process look like for companies that have been successfully funded at your firm and what does it look like for companies that haven't? This is pretty obvious, right? Ok, maybe it is, but again, how come I'm never asked this? And it's verifiable. Shouldn't you ask to speak to company CEO's that have gone through the process with the firm, so that if there is a variance, you know that a funding event is unlikely or more likely to happen? Look. Every firm, and every investment professional at firms, acts differently. Their processes are different. But you should know that upfront.

Let's face it. Time is too important to waste. Not our time. YOUR time. There is enough money out in the world right now, between angel investors, venture capital firms, and hedge funds, to fund a lot of early stage companies. So if the actual process is varying without explanation from the described process, if a key member of a team hasn't seen your opportunity yet, if the firm doesn't have enough dry powder to do your deal, you probably are wasting your time. Move on, and get into the value creation part of your entrepreneurial career.

Comments

[Danny]

David, great post. Is it ok to ask the fund about their mandate to LPs?