What should you ask the VC?

I was thinking about what I'd ask were I raising venture capital. Funny is that I often think about what I should ask entrepreneurs when determining whether to invest. I've often enough told entrepreneurs they should be asking their VC's just as many questions. I never really said though what they should be asking. My bad! Well, in order to be fair, here's what I'd be asking a VC were I interviewing him for the highly coveted position of investing in my business (note the satire!)

1. Who's responsible for your track record?

The boring question would be "what is your track record?" This doesn't answer what you'd like to know plus it's where you'll get the most personal marketing bullshit. Who are the VC's "go-to" people is probably the more important detail. How does he get you in the door where you need to be pitching? Has he been opening doors in the past that led to revenues, partnerships, mergers, acquisitions, exits?  Is he all lip-service about all that he can do for you or does he execute? No one works alone on the VC side. You have to have a strong network of people not only whom you can call but on whom you can depend. I answer this question as honestly as possible when asked. I know where and even better where I can't help you. I'll tell you openly when I can't add value.

2.  How involved do you plan on being in my company?

This is a double-edged sword. The answer can be as little as "I'll be a board member" to as much as "I'll call you every day to see how things are going." Be afraid of both! It sucks if someone only comes to board meetings and is otherwise completely unreachable. At the same time, someone who's on your back each and every day is taking up too much of your time. If you need them there every day, you're not good enough to be running the company anyway.

3.  How much vacation a year do you take (no, seriously, ask this)?

There are hardcore VC's out there who work night and day. At the same time, there are basically "racehorses out to pasture" as well. They've been superstars but they are "doing this for fun" now. If accessible, there's nothing better than these guys. On the other hand, they tend to take month-long "trips" without any interest in business, calls, interruptions or whatever. Ask! It may make the difference between getting the advice you need or trying once again to figure it out on your own.

4.  Will I have access to your partners?

I have really smart guys working with me. I often ask them for their help, advice, insights. Why shouldn't you? Ask the partner you are dealing with if you can also access his partners in times of need and how they can fill in the gaps when it comes to making your business successful.

5.  What is the process for a follow-on investment and how much capital will you reserve for this?

People usually are so focused on getting the first round that they forget the rest. Ask about the process for a follow-on investment. Will there be a whole new due diligence process? Will the VC have to prepare a whole new investment proposal? Who will determine whether additional capital is injected. How long does it take? Most importantly, will there be capital for a follow-on investment? Sure, you're pitching that this round will take you to an exit or break-even. Hey, how about planning for a rainy day? Ask what will happen....just in case!

6.  What stage of the fund's lifecycle are you in?

Remember, as a VC, we're investing other peoples' money (as well as our own). There's a lifecycle for a fund (which I won't go into but find out more here!) If we're towards the end of the investment lifecycle, we're probably looking for a different stage company then were we at the beginning of the fund's lifecycle. Sure, there are exceptions and we make them often but it doesn't hurt to ask.

I'm sure there are more and even better questions but these are the ones initially popping into mind when I think about the process of raising money from VC's. Feel free to add your own in the comments if I missed any.

Comments

[Philipp]

I think you are right in that entrepreneurs are very focused on the deal terms, forgoing lots of the issues that matter later in the relationship. Your fifth point is one of the most important in my eyes, since this is basically the question of commitment down the line. Entrepreneurs should look for investors that want to go through with the whole idea, not just make a quick in-n-out buck.

[David]

Paul - that's a really great post. Thanks. It's great to see it from this perspective and is a good ground for an actual conversation rather than having the entrepreneur answer one-way questions. Very helpful post. Keep it up. Liking your posts a lot lately.

[Paul Jozefak]

There's nothing wrong with a quick in-n-out buck but this only works when both the VC and entrepreneur work together towards a mutual goal. It's surprising how much of a difference this makes. Only works if you ask one another the right questions and enough of them.

[Paul Jozefak]

Are you saying my previous posts were less than "good"? ;-)