Preparing for and accepting a venture capitalist (VC) investment marks a significant moment in the growth of any business. While your business acquires funds to develop, you will trade equity and partner with an organization that balances its own goals. A VC will assist your growth, but it must also see a clear path towards an exit and return on investment.
To that end, when seeking out investment in your business, what are the questions to ask a VC and internally to position your business for the perfect “yes”? This guide has your answer(s).
Approaching VC Investment
If securing VC funding was as easy as giving a product sales pitch, many businesses would have no problem gathering investment. However, a VC will be more interested in your team, market, strategy, and current growth to determine whether or not they believe your business offers an investment worth making.
From such a perspective, discussions with a VC can be thought of much like a job interview or even dating. It’s as much about the questions you ask as it’s about your answers to theirs.
Asking the right questions will not only help you decide if a given VC offers the right partnership for you—they’ll also reveal more about your business and the people your potential investors would be working with.
#1 “What Would Our Ideal Partnership Look Like?”
Knowing the VC partnership you prefer is as necessary as the investment itself. If you don’t have an idea of what your ideal partnership looks like, you won’t be as ready to walk away from an investment that doesn’t align with your strategy or sacrifices too much decision-making autonomy.
Different VCs engage differently with the businesses they choose to fund, so consider what type of partnership you think will benefit your growth the most. VCs will also vary in their ideal returns. Do they intend to move aggressively and recover investment in the short term, or are they prepared to wait out a long haul?
When a VC partners with your company, their investment typically involves human capital in addition to financing. Sometimes this may be limited to exchanging board positions and equity. However, a VC may also be more involved in your operations.
What opportunities might they offer?
It’s paramount that you ask about:
- Industry expertise
- How often they intend to attend non-board meetings to provide insight
Analyze your team and potential organization weaknesses to help determine where a VC might help the most.
#2 “When was the Last Time You Invested in a Company?”
Asking a VC about their most recent investments will help provide visibility over their own fundraising efforts. If a VC’s most recent investment occurred more than six months before, you might want to consider another potential partnership. Long gaps indicate that the VC remains in fundraising mode and might even face difficulty in closing their next fund.
VC investment does not occur overnight.
Your business operates on it’s own development and operational trajectory, as does theirs. Some VCs advise that the process from introduction to securing funds may take six months or more, so you’ll want to plan well ahead. A VCs own fundraising operates cyclically, so you need to make sure that the timing works for all parties.
If you’re aiming for a shorter cycle, beware of VCs that intend to use a developing partnership with your business as a means to convince more investors to help them close their own fundraising round.
#3 “What are Your Timelines and Pre-Funding Processes?”
A potential VC’s timelines and processes may be one of the more overlooked questions that businesses and entrepreneurs should be asking. Even if your meetings proceed well and the partnership opportunity seems beneficial, what should you expect next?
If timelines and processes are drawn-out or cumbersome, you may encounter too many barriers to actually acquiring the check.
Ask a potential VC what percentages of their meetings convert to term sheets and how often those convert to delivered funding. Ask what level of interaction and the number of meetings the VC will expect, as you’ll need to take time out of your existing business responsibilities to accommodate them.
#4 “What Does Ongoing Investment Look Like?”
If your business seeks a VC investment, you’re likely looking for more than an initial lump sum that a business loan might offer. Ongoing investment partnerships will continue through different funding rounds, and preparing for VC investment requires a long-term strategy.
Ask potential VCs:
- Do you intend to lead multiple rounds? – Each round of funding you intend to secure will require a lead investor. Can you depend on a given VC to lead multiple rounds, or will you need to seek other lead investors moving forward?
- Do you regularly make follow-up investments? – Much as it is easier to keep a client than land a new one, securing funding from the same willing partner often proves easier than seeking new investors. From an alternative perspective, you may wish to rely on a VC who can assist with different networks and industry expertise depending on where your business projects to be when additional funding rounds occur.
- Do you often partner with other VCs? – Asking about other VCs provides a potential lead on who to contact next. Perhaps this meeting falls through. Perhaps this VC is interested but not as a lead investor in this or other rounds. Perhaps a VC may not want to pursue investment even if they think you provide a strong partnership opportunity and will make an introduction to a firm that better aligns with your needs.
#5 “What will the Partnership Entail Post-Funding?”
Use your meetings with potential VCs to determine the “attached strings” following an investment. Simply asking for expectations may not provide enough information, so be sure to follow up with specific questions to determine how a VC will intertwine with your vision and current operations:
- What would be the first thing you want us to do after closing the investment?
- What is your primary concern regarding any risks you perceive?
- What will be the most intensive part of your due diligence process and ongoing monitoring?
- Would you introduce me to one entrepreneur who succeeded and another who failed?
Gathering this information will give you a better view of what you can expect from your VC partnership. If you start thinking that a given VC’s involvement will prove more detrimental, their investment offer likely will not ultimately benefit you.
Finding the Right VC Funding with CFO Hub
VC investment carries many more considerations than a straightforward business loan. Their invested money only comprises part of the equation. When seeking and evaluating VCs, you want to keep long-term partnerships in mind and formulate your questions for them accordingly.
If you’re just beginning your VC process and feel a bit overwhelmed with all of the factors, CFO Hub can simplify the process for you with expert advice that’s backed by years of experience.
As a financial consultancy and outsourcing firm, we can help guide you along your journey of growth and demystify the VC investment process so that you can choose the right partnership that will see you succeed. Ready to gain a new partner that has your best interests in mind?