When you go to raise venture capital, if you are in the fortunate group of start-ups with access to venture capital, you’ll either have options (more than one VC wants to fund you), or you won’t. Or sometimes, you’ll be in the middle, where you want to raise venture capital and can, but don’t need to. You’ll also have options in that scenario.
If (x) you only have 1 offer and (y) you need to raise venture capital, the only question to ask is probably When. I.e., when can I get the money? 🙂
But if you have options, either more than one potential funder, or you don’t need money now but want to take it to grow faster, then dig in. And most founders don’t really ask the most critical questions of VCs.
The Four More Important Questions to Ask an Early Stage VC are:
- what price is it OK to sell at?
- when and if will you write us another, second check if we need one?
- what will you do to help us raise the next round?
- what if we fail?
Let’s look at each one, but first, why don’t founders ask these questions? Two reasons. First, like almost all of us, founders are attracted to brands. 90%+ of founders want a top brand investor. Often, a term sheet at a good price from a top brand is all founders really care about. And second, what sophisticated founders also dig in on is who can help the most. You can only sell so much of the company, so it’s wise to pick the best partner at each stage. Who can help me recruit a management team? Promote the company? Make the company hotter? Create a general halo for lay recruiting (this is real)? Etc. Different investors have different skills here. Many have none. Actual value is more important than brand, but brands are a proxy for some sort of value.
Finally, some founders after deciding who can help the most, and how important and big a brand they can get, move on to reference checks. And these are important. But mostly, reference checks sort of tease at personality fit, which is important.
However, if you have choices, brand+help+personality fit are great, but go further. The real question in venture isn’t what happens when things go great (everyone is happy here), but what will happen during tougher times. Most VCs have platitudes here, but the key is to dig in with 4 tough questions:
- What price is it OK to sell at? This is a tough conversation to have early, when every investor is really hunting unicorns. But ask it anyway. At least, later in the process. And ask it in an unguarded moment. Many investors really will be looking for you to “exit” at a price at least equal to their fund size. Most will be hoping for a 10x return on their investment. Some will truly be OK with whatever works for you. But ask. Just in case it ends up you don’t build a decacorn, it’s good to know about Plans B and C.
- When and if will you write us another, second check if we need one? This is a question not enough founders ask. Especially with seed investments, start-ups often need a little more money. What will it take to earn a second check? Some smaller investors don’t really do second checks. Some bigger ones always reserve a buffer, but have strict criteria to earn it. Ask. Ask so you know later and don’t have to guess.
- What will you do to help us raise the next round? The top investors at each stage have a superpower: the next stage investors all want to fund their start-ups. Ask about how many of their investments have received uprounds, and from whom. And importantly, ask who made the intro to those investors. Pick seed investors that can deliver the next round for you — if you deliver the results on your side. Many VCs claim they can do this, but actually few can. Maybe 10%-15%.
- What if we fail? Just ask to know. If you lose all this investor’s money, will it end their career? Or does it not really matter? It can be hard to tell on the outside. If a VC just made $1b on a hot IPO, losing $1m on your start-up may not matter. By contrast, a $5m check from a brand new VC that has no winners yet … well, the good news is you’ll get a lot of attention. But losing that $5m could be a career-limiting move. A bit more here.
Ask these questions now — so you don’t have to ask them later when it’s awkward. Ask them now so you’ll know now, when the stress isn’t there and the shine is new. Ask so you know.
You may not feel comfortable asking all these questions. That’s OK. Blame it on me and SaaStr. Say we told you that you had to ask.
A bit more here: