Know Thy Investor

<aside> 💡 You can and should ask questions about VCs that you speak with over the course of getting to know each other.

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↗️ Do you lead?

You want to start your process by finding a lead investor. If a given fund doesn’t lead deals, keep talking to them, but prioritize finding a partner who will. Many processes die because founders can’t find a lead funder.

I can’t stress this enough. It’s easy to find a dozen firms that want to fill out a round, but most will want someone else to lead first. A lot of founders will get 3+ meetings into a process before discovering this fact — a HUGE waste of time.

🪑 Do you typically take board seats?

This is another question that gauges how seriously the VC is taking your company. Financial capital is easy to come by and easier to deploy — reputational capital and VC time are the real currency in today’s venture market.

🏦 How much is reserved for “primary” vs. “follow-on?”

Most VCs make an initial investment and “reserve” funds to maintain their ownership in future rounds, or to help a struggling startup that needs cash. These reserves are usually described as a ratio, eg. 4:1.

So if a VC invested $1M into your seed round, they theoretically have $4M earmarked for your future rounds. But don’t assume that they will, especially if you have a rocky start…

🎲 How often do they “follow-on?”

FC is not a life-cycle fund, but we always make a small investment in the next priced round to signal our support to other VCs. Most firms make individual decisions about companies and that can create “signaling risk” for startups.

🥞 Have you led follow-on investments?

One benefit of having ample reserves is that VCs can “bridge you” if you’ve not achieved breakout growth. However, some firms have policies against doing this, which also negates the benefit, to you, of the fund having big reserves.

📰 What are the reporting requirements going forward?

It’s good to set expectations about communications expectations at the start — some VCs are good with quarterly check-ins. Others will want you to make formal presentations to the partnership annually.

🤝 Will we interact with anyone else on the team?

Some firms will ensconce you in CEO forums, introduce you to cross-functional teams of specialists, and cater to your every need. Others will write the check and ghost until things start going well.

🥈 How do you handle potentially competitive situations?

Ask the VC their practice for sharing information within the portfolio. What if a seemingly competitive company pitches or they receive a pitch deck — what’s their policy on how to handle these situations?