VC-entrepreneur relationships can be like marriages, just that the likelihood of a divorce (exit, wind-down) is 100%. But until then its important you forge a good working relationship. Not become friends (although that can happen it may not always be a great idea), but the entrepreneur should see the VC as a trusted advisor and the VC needs to respect that it’s just that: advice.
You’ll obviously get a good sense for chemistry in meetings, and sometimes it can be better to have more than less. Sometimes things change when you are negotiating terms, you can read a lot from how people negotiate. Also meeting up for dinner, lunch etc and to talk about other stuff than the company / investment can reveal a lot. In short: the more interaction before you commit the merrier. Ideally you’d get into a fight and then be friends again but that isn’t always feasible.
In any case, as an entrepreneur it’s super important you go do due diligence on your investor just like they are doing due diligence on you and your company. So here’s some things I’d look out for as an entrepreneur:
Technical Fund Due Diligence (basically: will they have money to fund me going forward)
- How much money does the fund have left? Unallocated, free reserves. If you’re an early stage company and are looking for an investor that can follow-on significantly in future rounds, you probably don’t want to be one of the last investments in that fund. You’ll be competing against other companies in the portfolio that are bigger, need more capital, have reached more proof points, etc. Thats ok, but not when there isn’t much money left in the fund
- How much time does the fund have left? If you’re a seed company and still have a long time to go you want to make sure the fund has say at least 6-7 years left, ideally more. Funds usually have 10 year life times, but the investment period (i.e. when the portfolio is built) is in the first 3-5 years. You want to get in as early as possible
- How do they access their capital? Usually a fund can draw-down capital from their investors really any time they need it. But there are a few other structures out there such as evergreen funds that sometimes can only invest when they free up capital by selling companies. Make sure you understand how that works.
- How do they make decisions? Can the partners you’ve met make independent investment decisions or is there someone else (e.g. a large corporate investor in their fund) that is calling the shots?
Fund Strategy Due Diligence (basically: where do I fit in and what does that mean)
- Do they have a relevant track record in helping to build companies like mine? An investor focused purely on e-commerce may not be so helpful for a SaaS business. Again there are of course exceptions.
- Do they have a relevant track record for the stage I’m at; or are they doing e.g. seed for the first time as its all the rage right now? Do they in general follow-on or not?
- Are you part of any “programme” (eg seed programme) in the fund, what does that mean for you?
- How long does the fund usually hold investments for. Are quick flips a pattern or are they long term investors?
- Have they syndicated / co-invested with folks you want to get on board later? Do they work well with other funds?
Partner Due Diligence (basically: who you’re marrying)
- What’s the partners personal track-record for companies like yours and the phase you’re at?
- Everyone says they have a great network. Is the partner already using it prior to investing? Is she / he being proactive about it?
- Is the partner engaged and passionate about what you’re building, do they truly “get it”?
- Is the partner a good sparringspartner? Can she / he help you make tough decisions? Are they more interested in your thoughts and opinions than their own? 😉
- Talk to entrepreneurs the partner has worked with. Be specific: ask about strengths weaknesses, high- & low-lights. Nobody’s perfect but if you’re not specific you’ll probably not get much of a useful answer. Ideally you talk to an entrepreneur that has gone through a rough spot and can tell you how helpful the partner was then.
- What position does the partner have within the fund; will they be a good champion for your company? Ask in general about how decisions are made, who’s on the investment committee, etc.
- What kind of policy does the fund have regarding partners on an investment. Are they frequently swapped out or will you be working with the partner you’ve built the relationship with?
No investor will be perfect, but you should make sure you get all the data you can to make an informed decision. I am sure there is more to consider and I’d be interested in your thoughts.