3 Must Ask Questions for Venture Capitalists (VCs) When Raising Money for Your Company | EP. 64 | Business Podcast
Summary
We Entrepreneurs are always so excited about turning our idea into a business, or taking our business and scaling it to the moon, that we will do about anything to get our idea funded.
The challenge with that is that taking money from venture capitalists, or any investor, is just like getting married.
Before any of us would get married to anyone, we’d always want to date for a while and have some fundamental questions we’d want answers.
I put together 3 key questions you want to ask any venture capital firm you’re pitching before taking their money.
Don’t make the mistake of taking money from an investor or firm that is not a fit.
It can result in you losing your whole business, and most of the time not because you had a bad product, or that customers did love it, or because your sales were not increasing, but because it just wasn’t a fit.
These are the 3 questions I learned to always ask from my 20+ years as an Entrepreneur and raising money.
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Hello, friends. Welcome to the show today. We’re talking about three questions that you should ask any VC firm that you’re raising money from. That’s three questions. Any venture capitalist that you’re talking to about potentially funding your company. Let’s not waste another second. Let’s get to it. I want to set the stage today and assume that you have a company that you’ve already vetted is a fit to be a venture capital investment. It’s a different subject, but I’m going to assume that that’s what we’re talking about.
So we’re talking to venture capitalists. Our company is a venture fund herbal business, and what happens is is we is entrepreneurs. We are so anxious to get money for our venture and get it going that we take this mawr passive role when we meet venture capitalists or investment firms and feel like they’re the ones in control because they’ve got the checkbook and they’ve got the money that we want. But what we need to remember and it could be hard because we want so badly to get our venture funded that will almost do anything to get the money. And it’s a mistake because not all investors air a good fit for us, even if they could write a check.
And I’ve had over my 20 year career. Most of the investors that I’ve ever had have been really great. But I’ve had some that weren’t a fit. Not that they weren’t really great. In fact, some of the skills that they brought to the table were awesome, and I wish it would have benefit because I think it would have greatly helped our company. But there was a few things where we didn’t align and it really hurt. It really hurt the business, and it hurt the business because it took cycles out of my time and and management time to manage through that. Things that took away from sales and product development, things like that, so not always is A is just because someone has money, a fit and that that’s super hard. It takes a lot of discipline to be able to say no to money, but I would offer to all entrepreneurs out there that are listening that it’s like getting married. You sort of you know, some people may take the idea like Hey, and they’ve been married five times.
They keep trying. But the break up is the painful part, and it’s really painful when it comes to money, not just in the marriage and breaking up and splitting it. But when it comes to a company and in many instances, unfortunately, it’s why a lot of the startups and early stage growth companies go go belly up isn’t necessarily because they didn’t have a good product or service. It’s because something happened on the cap table. Ah, and from a financial perspective, it just got sideways and going back to today’s topic. We need to remember that we’ve got to interview the VC firm and you should not walk into any of these firms without having done your research.
And they’re going to ask you a lot of questions, and at the end or leave time, they should say, Hey, do you have any questions for us? The good ones will do that. Even the top ones will do that, And I’ve got three questions that you should ask. So number one, you can say something. The fact what you should have done. I’ve done some general research on your firm. You look really good. That’s why I’m here. Can you tell me more about the current fund that you would be investing out of, and here’s what you want to know. Usually, venture funds invest for their 10 year terms, and they’re going to invest for the first 4 to 6 years.
That means they’re gonna put that money to work in that fund. If they have $100 million they’re going to invest 80 million if they have a 2020% or 2% management fee, which is another discussion, how Venture Capital works. But they’re gonna invest that money and then the remaining years they’re going to work on the companies and look for exits, and that’s how they get. That’s how they make their money. They sell the companies or sell their positions in these companies.
The reason you want to know that is because if they’re in Year five of the current fund, they might not have room in their investment strategy to make an investment in your company, and you want to know that as it relates to them, being in your pipeline is a potential investor, and here’s what I mean. Even early stage venture capitalist, they allocate different stages of companies. They may say we’re going to make 10 investments and three of them are going to be free revenue.
Three of them are gonna be revenue based and or are going to be have revenue growing and are near profitability. And that’s how they think about their investments. They not most venture firms, aren’t going to just make all early stage investments and just let it roll, mainly because they’re investors. They’ve got to manage their portfolio just like you manage your stock portfolio. They’re doing the same thing, and you want to understand where they are. They may not have a lot of what they’ll call dry powder, meaning how much money they can invest.
In fact, that’s an important thing to ask. So you wanna ask where they are in their current fund cycle, you might find out that they’re raising a new fund, which means that they’re not gonna have any money to invest in you until they raised that fund. If they say we’re raising to fund currently asked them where they are in that stage, how much are you raising their raising? 150. How much have you closed? We’ve closed 50 Well Now you know what’s the threshold for you to start investing? And they’ll say, Well, when we get over 75 we’re going to start putting money to work. And you’re like, Okay, now you start to get a sense of where to fit them into your pipeline because you need to know Justus much about them is they know about you. So I understand where they are and what types of investments they have left in their current fund to see if that’s a fit for you. Question number two, Ask them in the last three investments.
Can you tell me a little bit about the dynamics and how it works? And what you’re looking for here is a process you’re trying to figure out what their processes did. They meet the entrepreneur and it took six months to close the deal. Did they meet? The entrepreneur took three weeks. So try to get and understanding of exactly what their processes and how long it takes so that you understand that a lot of people think that you’re gonna walk in picture venture capital radio check, and that does happen. It’s happened to me a few cases with investors that on a first meeting, I walked away with a check. But it’s not the norm. It’s not the norm.
It’s the stories you hear, because those were the exciting stories that make the news and make everybody get excited. But you should set your expectation. That is not the norm. There’s a diligence process. They’re going to give you a term sheet likely, and that doesn’t mean you’re going to get the money. It means that now you’re in this due diligence phase that could take another eight weeks. That’s what you’re looking for here. How long is their due diligence? What does that look like? Are they? If you’re a software company, are they going to do a code review? If they do a code review, what does that involved? If they want to talk to customers, how many customers they want to try to understand?
When you’re asking this question what their processes and you’ll get a good sense of that from the last three deals and they should be happy to talk to you about it. Number three, A really, really important one. How does their firm make decisions? So that means they’ll generally have Monday meetings where they go over deals that they’re looking looking at, and some of them will have made a vote. Some of them will say, Hey, we want some more diligence or they’ll be an update and you want to understand is in a firm. It’s the majority of partners. Is it all the partners have to say Yes. You want to make sure that you understand what that is?
Is there an influential partner? Is it apart? Is this firm a single founder where that really is the managing director? And he had Or she has to say Yes, as the person you want to understand that process and especially true. If you’re talking to an associate in a venture firm now what’s happened is, is entrepreneurs got smart over the years and basically said, Hey, we’re not gonna meet with associates because associates can’t make decisions. So venture firms change their naming convention and call Ah lot of effectively associates partners because then it makes you feel like you’re talking to a partner. But ask the question regardless of what all these titles are at the end of the day, what you’re really looking to understand is how do they make decisions? And what does it take to get an investment done?
And then you can understand the dynamics and you’ll understand at that point, the if you if they’re interested in you and you’re interested in them and there tends to be a fit what that process is going to look like and who the important person is Now, I said I was gonna give you three questions, but I’m gonna give you a bonus question that you should ask at the end, because at the end here you will have given your pitch. They will have asked you a ton of questions and just ask him, say, on a scale 1 to 10 10 being you’re going to give me a term sheet Monday with no questions on valuation based on what we’ve discussed, how would you score this opportunity that we are company presents to you and let him give you a score? And at least then you have some feedback and it gets the dialogue going of. If they’re a nine, then you say, Hey, what’s it gonna take to get to attend? If there’s seven, you can figure that out. And if there are three, then you get in idea there.
It’s a direct question that probably will make your heart pump a little bit when you ask it. But it’s a really important question because I can tell you there have been too many times early in my career when I went and pitched investors and walked out of their thinking. Okay, well, I don’t even know what’s next, like, what was that? And you wind up in this black hole with no direction. It’s really, really important for you as you embark on a fundraising process, to take control of that process and to treat it just like you were looking for a partner. And what would you require to get married and get into a relationship where you’re going to share your checkbook and control of that checkbook so really important to do? Those review three questions with the bonus. First question is, I’ve done my general research on the firm.
Can you tell me more about your current fund number? Two. Can you tell me about your last three investments and the dynamics and the process Number three. Can you tell me how your firm makes decision and the bonus. One is on a scale of 1 to 10. Where is the opportunity that we’ve given you today? Wow, good luck and take control of this process. This is your process. Is much of it is there’s and thank you, friends, for tuning into the show. If you enjoyed this episode, please rate review. We want to hear from you and subscribe So you don’t miss any of our weekly episodes until the next time. Remember, you are just one business plan. The way I’m rooting for your success, we’ll see you soon.
