It might seem nerve wrecking to meet with a venture capitalist. After all, you are trying to raise money for your company. But just like during any business meeting, you should be armed with questions. It is vital to select a venture capitalist that will be the perfect match for your company.
“To choose the right venture capitalist for your start up, you should look for someone who has a track record in your industry and can help you grow stronger and faster. They should ideally be a resource for your business not just in terms of money, but with shared vision, key contacts and expertise in your field,” explains Elle Kaplan and CEO and Founding Partner of Lexion Capital Management, one of the only 100% woman-owned asset management firms in the US.
1) Beyond money, what else do you bring to the table? “Ask the VC what they will do for you (other than money). What contacts do they have that will be useful (potential executive team members, distribution partners, customer leads, potential co-investors or follow-up investors, etc)?” says Mike Scanlin of Born To Sell. “Make sure your VC has a deep Rolodex. And are they a strategic thinker that is likely to help you at board meetings with tricky issues?”
2) How busy are you? “Ask them how many other boards they currently serve on. If the answer is more than 6-8 then you will get very little of their time other than at board meetings. A good answer is 2 to 6,” says Scanlin.
3) Are you a hands-on investor? Before taking money from an investor, you will need to decide what type of investor you want—one who is very involved or one who likes to stay in the background.
4) Can you provide references? “ Ask to speak to the CEOs of other companies whose boards they sit on,” says Scanlin. Ask those CEOs if the VC is useful (1) at board meetings, (2) between board meetings, and (3) when things get tough,” explains Scanlin.
5) Who will be my point person? You want to make sure that someone in the firm will be appointed to you and will be available for you.
6) Do your personalities click? “Ask yourself if you like the VC’s personality. Would you invite them over for a BBQ with your family or do they have an annoying personality? By taking their money, you will be married to them for years so you better like them,” explains Scanlin.
7) What is the value of funds under your management? You want an investor with a substantial portfolio and a good track record.
8) Have you ever invested in our space before? “If so, what were the successes and failures? If you’re a solar company (for example) you really don’t want a solar neophyte to be on your board. Make sure he has relevant industry knowledge and experience,” notes Scanlin.
9) Can you explain the tenets of the shareholder agreement? You want to make sure you two are on the same page and that you understand all the details of the deal.
10) Why do you want to invest in my company? You want an investor who shows passion for what you do, who believes in you and your product.
Once you have selected a VC, you still need to tread carefully. There are some mistakes entrepreneurs make when seeking funding, says Saad Shahzad, Chief Strategy Officer at Los Angeles-based startup, dinCloud. They include:
· Taking a high valuation. “This could be a big mistake that an entrepreneur makes for their company. It can be lucrative to take a high valuation from angel investors, who may not be considered to be as sophisticated as an institutional investor. When the institutional investor comes in for the next round of funding, the high valuation can scare them away or cause the company to take a down round on valuation, which means significant dilution for the angel investors,” he explains.
· Taking equity vs. convertible debt. This can be a disadvantage on the next round of funding as well. “Entrepreneurs always have to be more far-sighted than the immediate round of financing. They have to structure the company’s capitalization so that it allows for future rounds and long-term solvency of the business,” says Shahzad. “Taking convertible debt and allowing it to convert into equity into some discount of the next financing round will allow the entrepreneur to not have to put a valuation on the business in its infant stage and also offer the angel investor a nice return once the next round of equity funding happens.”
· Not providing regular updates. You have to keep your investors in the loop. “It’s prudent to provide regularly scheduled updates to the investors so they feel like they have a grasp on the investment and their investment is protected,” he explains.