Bootstrapping only gets you so far; eventually, if you’re serious about growth and seeing your startup through to its logical conclusion, you’re going to have to talk to venture capitalists.
And while those VC analysts and principals will have all manner of questions for your company, don’t forget it’s a two-way street. You have the right to ask questions, too - and you should. These people will be working very closely with you for several years, so you want to make sure they are the sort of people you not only get along with, but that won’t blow up at the first sign of pressure.
So along with “how do you handle stress”, here’s 9 other questions to ask your VC fund before accepting their money - and remember to work with your startup accountants to get your forecasts and business plan ready before you hit the streets!
What’s your investment process?
You want to know not only whether your company suits their portfolio, but what the average timeline for them to decide whether they will invest or not. The number of meetings and the various milestones along the way can vary between firms and stages, so ask upfront so you can manage expectations both internally and with other funds you’re talking to. The best way to go about this is to try asking how long the last investment took from first meeting to actually deploying capital.
Where are you in your funding cycle?
A little background on how VC funds work: they raise capital to invest in dedicated funds which often last 7 to 10 years. When they’re in the early stages of a new fund there’s a lot of money to go round but they’re looking for safer bets with big returns; in the later stages they may be more likely to take a risk. Timing matters - you need to know if there’s enough dry powder for them to make a decent investment. But also be aware that when it reaches the last third of the fund’s life, the VC firm may be focusing on raising their own next round of capital and their attention may be diverted elsewhere.
How do you make decisions?
You need to know how decisions are made, each fund makes its final decisions in different ways - some require all partners to agree, some let partners make their own decisions. Knowing the process will help you better understand your chances.
Do you invest at my stage/ in my sector?
While it’s true that not every fund specialises, there are some that do, so understanding previous investments from the fund will help you understand if you’re barking up the wrong tree. You could improve your chances if you’re, say, a health tech firm and you’re talking to the leading fund for healthcare tech. Likewise, there’s no point talking to a seed funder if you’re looking for Series B. Do your homework first but do ask upfront.
Do you have anything competitive in your portfolio?
It’s important to ask this because not all VCs will be upfront about this. Some will tell you at the beginning of the meeting that they have a competitor in the portfolio already, others will wait.
It’s likely if they have a conflicting company, they’re just doing market research, so this is a good question to ask early, too. It will help you understand how to develop your pitch.
Will you take a seat on the board?
If they’re going to be taking a seat, you need to be able to work with them. This is where personalities come into play, but also where it’s good to know the answers to the next question. Will this investor be hands-on or hands-off? Will they be controlling or flexible? Relationships count for everything when it comes to VCs and startups.
How can you add value to my company?
Some funds can act as a lead investor and introduce you to other investors; some even have value-add services like recruitment, startup accountants, tax compliance, and governance services. These added bonuses can help make operations smoother.
What are your expectations on returns?
The big one. If they’re going to push you to a 20X return when you’re just looking for 5X and then exit, your expectations are out of alignment, and that misalignment can lead to them blocking you achieving personal goals that don’t fit their professional ones. Set the scene early, and don’t get scooped up in talk of what could be. Be firm in what you want unless you are truly convinced that your venture can achieve more.
Where do startup accountants fit into all of this?
Compare accountants and see how a startup accountant can help you with writing a business plan, growing your business, or preparing for funding. Startup accountants are essential when you’re out there talking to VCs as your financial forecasts will be under intense scrutiny.
Startup accountants can help make sure your financials are presented in a way that makes sense to the investor, and that they are realistic - you don’t want any miscalculations coming back to bite you just as that sweet funding is within reach.