The wrong investor can really traumatize a startup’s growth trajectory. Stupid questions, micro-managing/backs-seat driving, pig-headed insistence on the wrong strategy, forcing bad executives on the company, halitosis – it’s a pretty long list. If you are a startup founder about to take on venture capital financing you should want to know everything you can about your funding venture capitalist prior to accepting an investment. One of the most basic tests you want to conduct is to speak with some of the other founders who have worked with the VC. This isn’t that hard – most VCs will expect this question.
Ask for introductions to founders who have taken capital from the venture capitalist
You’ll want to have an honest, founder-a-founder conversation. Your goal is to make sure that they venture capitalist is someone who you want intimately involved with your company for the next five+ years. Are they trustworthy, do they actively try to help the business, do they listen well, are they approachable and very importantly, are they NOT jerks.
Prasad has begun this phase of the fund raising process. I’m hoping he will have some insights to share on some of the conversations that he’s started to have. However, I think the basic questions that every founder should want to be able to ask other people who have taken the investor’s money are:
- How responsive is the investor
- What help, beyond financial, do they provide
- How involved do they get with your business – try to keep this open ended so you don’t lead the other founder to the answer you want to hear. One founders “very helpful” could be another’s ”smothering.”
- Do they prepare for board meetings
- Do they make helpful introductions (customers, potential members of the team, other funding sources)
- Have they been transparent with their time frame to exit
- If you had to do it all over again, would you accept money from this investor
I am sure that other people have had successful conversations like this in the past and I’d love to hear what was asked and what was learned!
July 2nd, 2009 at 3:35 pm
I would also ask how they behave in a crisis. All startups go through these. Are the investors calm under pressure? Do they help make the right decisions? Or does another side emerge?
I have lived a bad investor-management fit many times. It just grinds the company to a halt. And nobody wants that…
July 2nd, 2009 at 3:41 pm
Yes, it's easy to be supportive when everything is going well. The true test is when everything hits the fan…
July 2nd, 2009 at 4:39 pm
We are currently going through this process at Pixily and one of the questions we have asked CEOs is how are investors reacting in this economy. Even the most pessimistic projections are being invalidated because of the economy and if an investor understands it and supports the entrepreneur, then that is an investor for the long term.
The other questions we are asking is:
1. What is the day-day working relationship with the investor? How engaged are they? How often do they want you to engage them and what reasons?
2. Investors want you to be transparent and share information with them, especially if things go wrong. How do they respond to it.
3. Do they provide strategic advise? Are they insistent that you follow them or leave it to the judgment of the leadership team to implement them?
4. If there were other investors, what are the differences among them?
5. Do they facilitate meetings between all the management teams of their portfolio companies to share knowledge, contacts, customers, ideas and expertise?
the CEOs of Investor's portfolio companies is how are the investors reacting considering everything that you projected whe
July 2nd, 2009 at 3:14 pm
[...] his Startable blog, Healy Jones lists VC qualities best avoided, including micromanagement and bad breath. Healy suggests performing reverse due [...]
July 3rd, 2009 at 5:52 am
No matter how bad they are would someone squeal on their fellow board member? Isn't there a risk of this information finding its way back to the VC which could potentially be highly damaging for the company?
Is thefunded.com a good way to attack this problem?
July 5th, 2009 at 7:12 am
OMG! I want to run around midtown town tomorrow handing these out to everyone! If I read one more article or blog about how little entreprenuers know about making presentations for funding, they do this wrong, that wrong, it's really funny to me because it US that are making them rich!
This is great I love it! and I wish it were on the front page of the WSJ !
July 6th, 2009 at 4:31 pm
Chandika, I think people are usually pretty honest when answering these types of questions. I've had very good luck in these sorts of diligence conversations. I do recommend asking more open ended questions vs. "is this person good or bad." For example, the question "how involved do they get with the business" will tell you a lot about the investor's style. If you are looking for a hands off investor and you hear that the investor calls the CEO every other day then you've learned a lot about the investor – even if the CEO you are speaking with sees the investor's calls as a good thing. Body language and tone of voice are also helpful.
I haven't seen the inside of the funded.com, so I can't speak to all the resources available to entrepreneurs. From the outside I think it is more focused on helping entrepreneurs figure out how to and which VCs to pitch. How a VC acts in a pitch is not necessarily how they will act once they've invested IN a company. If the funded has a structured way for entrepreneurs to report on the VCs who have invested in their business then I think it would be very helpful. For example, if enough entrepreneurs (who actually had the VC on their board) responded to a survey on that VCs helpfulness in making VP level hires, and attendance and prep. for board meetings, etc, then I think you could learn a TON about the VC. But I don't know if the funded.com has this type of a resource, although I would encourage someone to develop it.
July 6th, 2009 at 4:45 pm
Thanks Healy. The advice on asking leading questions is excellent. Reading between the lines helps
The funded has comments on individual GP's in most funds and people who have worked with them and people who pitched them leave comments. However, they are rarely very detailed and sometimes emotional (especially if they are pitching related). It should end up being like Linked-In recommendations though it has a long way to go.
Even then, as you say, it always helps to ask.
Thanks!