So you have been lucky: your idea is the next Google and investors have decided put a pile of money into it. This is all good news — after all, it is not easy to impress venture capitalists. Building a company from scratch is a very difficult business and you need to be prepared.
Choosing the right VC is a tough decision. I was once told by a VC that the relationship between a startup and its VC is very much like a marriage. It is a long-term commitment that is full of struggles and disagreements and it is quite difficult to exit. Sometimes the relationship will end badly, other times the startup will exit gracefully and there will be happiness for all.
So before you commit yourself to an almost unbreakable bond, you should ask your VC some very serious questions to make sure you have made the right decision. Because, aside from financial support, you need to know that you can work together. A VC jokingly said to me that it is important to conduct the “asshole test” before agreeing to say yes.
So here are some questions:
What is the company’s fund profile?
It is important understanding the fund profile. You want to ask:
- How many investments has the VC has made in the current fund?
- What is the value of the total funds under management?
What is your investment experience?
In a highly competitive and risky environment such as tech, you need to know if the person you have agreed to help you fund your business is qualified. You need to know:
- How many companies have you invested in?
- How many have succeed and how many have failed?
- How much was your last exit?
Is this an investment that you are willing stick to and walk away when things get tough?
Investors have been known to back out of a second round of funding, so you need to know where your VC stands on this particularly sticky point. If they back out, you have to make new plans for your business. Is that something you are prepared for?
Is there more than just financial support?
It is great to get money from investors but startups need more than that to succeed. Things you need to know:
- Will your VC bring some added value to the table and help your business grow?
- Will they analyse your business and help you strengthen your weak spots?
- What growth strategy ideas do they have?
How many companies do you invest in a year?
You need to know the ratio of VC vs startup. Is the company investing in a lot of ideas or are they very careful about their investment choices? Knowing these things helps you position yourself with the company.
How much money do you intend to make off this idea?
This a money game. So you need to make sure you haven’t sold your soul to the VC with very little hope of getting anything for it. Some things you need to know:
- How much of your business does the VC own? (Share split)
- What are the VC’s expectations?
- If you want to sell the business for three times the invested capital not 10, will the VC stand in the way of an exit?
Is it possible to talk to some of the other companies you’ve invested in?
Okay, this one is ballsy, but you need to know if you are about to sign over your life to the venture capital mafia who will break your knee caps or a saint who will hold your hand through the whole process. You must know who you are about to be get into bed with. This also allows you to understand the kind of pressures you can expect from the VC as well as the work ethic.
Obviously some of these questions you will need to elaborate on yourself, but it is important to know that your VC is willing to answer at least some of them.