Much has been written about how to secure venture capital funding, but far less about whether a founder should sign a term sheet and say ‘yes’.
Like all industries, there are great funds, good funds, average funds – you get the idea.
For founders thinking about whether to accept an offer from a fund, here are five key questions they should ask themselves.
Do you like them?
The world of finance has a cut-throat reputation, but early-stage venture capital is very different. As a founder, the decision to take investment from a fund is one of the biggest you will make and sets up a relationship that will last for many years.
Asking whether you like the people who are about to become a significant part of your life is entirely valid. This is not naive, but sound business judgment – relationships based on trust, mutual respect, and shared values will outperform.
What will they do?
VCs are not shy about claiming that they are adding value – if in doubt, check out @VCBrags – but founders’ and investors’ expectations can differ significantly.
In one recent real-world example, two funds who had written equal-sized checks were helping a newly invested portfolio company scale up their team after a seed round.
Fund A’s involvement included defining a full hiring process, writing and reviewing job specifications, screening hundreds of resumes, conducting dozens of interviews, and handholding the CEO and CTO to close candidates.
Fund B’s approach was to provide emailed comments on resumes without taking any calls with the candidates – since the comments lacked any context from the full process, they were of little use.
This contrasting approach can apply to the myriad other areas where investors provide support, such as sales or product strategy, or fundraising, and founders should ask their prospective VC firm how involved they expect to be post-closing of the round.
Do they have the capacity to deliver?
Venture capital funds are lean operations and the team has to split their time across multiple investments. It is, therefore, important to figure out and get comfortable with who within the fund will be taking the board (or observer) seat and supporting you on your journey.
As a general rule, you want to be operating in the ‘sweet spot’ for the fund to get the maximum amount of time and attention. This means that the check they are writing into your company fits their fund strategy and is meaningful for them.
Founders are most often disappointed when larger funds move down the capital structure to write smaller checks and then cannot offer hands-on support because they have many other larger companies to look after.
Do they have a good reputation?
A fund’s reputation has two dimensions – how they treat their founders and how they are perceived in the market. As a founder, you must ensure that you validate both.
The former is important for the smooth running of your company and your mental wellbeing; the latter for the positive signal it sends to the market when you go out to raise a follow-on round of funding.
Taking references from portfolio companies suggested by the fund is fine. There are likely valid reasons they want you to speak to founders they have been working with closely in recent months or perhaps are in the same or similar sectors. But make sure you also ask to speak to several other portfolio companies of your choice and look at independent resources such as Landscape for the full picture.
Are they aligned on the exit plan?
Once you have agreed to take investment from a venture capital fund, you have agreed to an exit.
The two variables you need to be concerned with are – when and how much. Mis-alignment on these can give rise to significant heartache.
Of course, nothing is guaranteed, but agreeing conceptually with your investor a timeline over which they would expect to see a return and whether they are only looking for unicorns or invest for lower returns is essential to make sure you are on the same page.