I have extensively written on what venture capitalists are looking for in startups (see my definitive checklist for startup success), to increase your odds VC’s will be interested in funding your business. But, what about the inverse?
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What do VC’s need to offer you, before deciding to take their capital? It is perfectly acceptable to interview them, at the same time they are interviewing you. Below is the definitive checklist of questions you need to ask VC’s before accepting their money:
About the firm
What is the firm’s track record of success? Have them list their best performers.
Does the firm have a “brand name”? Some startups are perceived as being better investment/startup opportunities, if a big name VC firm is involved. This may help you attract other investors and business partners in the future. But, there are plenty of great lesser known investors.
How big is their current fund overall? And, more specifically, how much is still available for future investments. You want a firm with deep pockets, for this round, and the next.
Is this their first fund, or their fifth fund? The more funds they have raised over the years, the more successful their investments have been, attracting new capital over time.
What business contacts can the firm help make introductions for you? Their Rolodex is often more important than their capital, to help you more quickly open doors to business partners.
About the team
What is the specific partner’s track record of success? It is less about the firm, and more about the person you will be working with day-to-day.
Does the partner have specific business experience, or only financial experience? It is always better to have the input of another successful entrepreneur who has actually been in the trenches.
Ask to speak to references from the CEOs of their portfolio companies. Nobody will give you a better sense of the value provided and personality of the partner, after the deal closes, than these CEOs.
Who from their firm will be sitting on your board of directors? Often times the senior partner who does the deal won’t be the person filling the chair on your board.
What experience does the partner have in your industry, as not all startups are created equal? Look for domain expertise in your industry and desired go-to-market strategies.
What is their personality and style? You will be spending the next five years with this team, make sure you can get along with them (in good times and in bad).
About the deal
Are the investment terms, valuation and deal structure fair and in line with market levels? You can benchmark multiple VC offers against each other, and research investment terms for a business of your size. Only work with firms that you feel are treating you fairly. A good startup lawyer can help here.
Not all cash is the same shade of green! So, choose your investors wisely, to increase your odds of long term growth and business success.