Luke Smith, Investment Partner at Forward, has pulled together five good questions to ask venture capitalists to understand your potential fit, what to expect from the process and the value they can add. Some can be answered by browsing a VC’s website but others are best asked during a pitch meeting.
1. How does my company fit with your sector and stage focus?
Not every fund has a sector focus. But for those that do, your chance of raising investment is much higher if you fit that focus. Concentrate on funds whose focus fits yours and you’ll improve your chances. Likewise, concentrate on VCs that invest in rounds of your stage and size. Get to know investors for later rounds (see Invest in Lines, Not Dots from Mark Suster) but meetings with later-stage investors are unlikely to turn into investment in the current round.
2. Do you have anything competitive in your portfolio?
In an ideal world, VCs will mention early on if any of their portfolio companies are potentially competitive, but sadly, that doesn’t always happen. A VC already invested in a competitor is unlikely to invest in you. You’ll see some funds with large portfolios making multiple bets in the same market. But a VC backing a competitor is almost certainly trying to get market insight than see you as a potential investment.
3. Where are you in your VC fund life cycle?
Most VCs raise capital to invest in dedicated funds. And when that fund is invested, they need to raise further capital before they can make more investments. Before spending excessive time with a VC, make sure they have capital to invest. It is possible to invest outside of dedicated funds through special purpose vehicles but it adds complexity and time. Conversely, a VC early in their fund life cycle is likely to be keen to put capital to work.
4. What are the steps to your investment process?
Every VC’s investment process will be different, so it’s reasonable to ask what to expect. The length of the process can vary hugely so asking up front to help you run a good process with multiple funds having time to come to a decision. Warning: I’ve yet to meet a VC who describes their process as slow, so take best-case scenarios with a pinch of salt. ‘How long did your last investment take from first meeting to cash in the bank?’ is a useful question to ask.
5. How do you work with portfolio companies?
A good VC offers much more than just investment. You should understand what additional value the VCs you are meeting can bring. Strategic guidance and a strong network are table stakes for VCs, but some offer added value such as recruitment and PR. When fundraising, try to find a partner that fits your needs. Any extra help a VC can provide should be factored in when deciding.