Raising money from VC’s creates a long-term relationship, so you may as well get a good understanding of each other and set up the foundation for a strong two-way dialog. The VC needs you as much as you need them, so the discussions should feel balanced where you’re learning about each other on equal footing. So, I suggest these questions to begin the first meeting and one important one at the end before you go. Getting started….
1. I’ve done my general research on the firm but tell me a bit more about the current fund? They should answer with the fund size (e.g. 200M), when it was raised, total invested to date, the remainder left for follow-on investments. Have they had any exits from the current fund (which companies, you can research later to find out how much they invested and likely returned)? Does the fund has any specific theme or stage focus (seed, Series A…)? Depending on the answers, you can get a sense of how likely they are to do new investments (you) and how the fund is performing so far (are they looking for some swing-for-the-fences (they have already done well on something or are very confident) or need safer bets). If early in the fund life (they usually invest aggressively in years 1-4, then follow-on with good companies years 4-7 and need to return the fund in years 7-10, but are likely going out to raise new funds around year 5-7 depending on how it’s all been going) you get more latitude in both their interest and time to make the company work. So, understanding where you fall in their overall cycle is important.
2. For the last few investments you (partner) or the firm did, can you tell me about the dynamics? This should include their check size, did they lead or follow someone else, how long did the process take from first meeting to a funding decision? You are looking for a clear process, a timeline of 4-6 weeks (or less).
3. Can you tell me how the firm makes decisions? This should include some generic dialog about the # of partners, who decides on what, when they have meetings (most on Monday’s) and how many deals they have in progress right now. Make sure you have some sense of the pecking order of the partner you are working with and how many other people you will need to convince. New guys have a harder time doing deals or they likely take longer as they want to satisfy everyone and/or doing safer bets, so tenure, rank and the recent success of the partner matters.
4. Is there any area where you think you/your firm adds unique or disproportionate value? Most VC’s give you a bullshit answer about a big network, ability to connect you with X or Y and some help with building out your team. If you hear some good specifics, you can be done with this question. If you get vague answers (highly likely), you can press one further with, “If I talked to 2-3 of your CEOs (currently funded companies) what would they say is an area where you have been especially helpful?” Again, you’re looking for some specifics and preferably in areas where you need help to grow your company.
Now do your pitch…keep it shorter than you think it should be (~30 mins), pause for questions along they way…don’t read your slides…focus on customer traction and specifics…make sure they know how much you are raising and where you are in the process… then…time to go for the close…
5. On a scale of 1-10, 10 being you’re going to give me term sheet Monday with no questions on valuation, based on what we’ve discussed, how would you score this opportunity? You’re likely to get some squirming on this one but wait for an answer. If you sucked, you are likely to get a 5 or 6 (they are being kind and not telling you it’s really a 3). 7-8 is pretty good and you’re not likely to get a 9 or 10, but if so, awesome for you! I usually follow this up with a “what would we need to do/focus on to get you to a 9?” This pins them into quantifying the aspects where you need to improve, at least for their investment criteria. In some cases, they will ask for things that you do not plan to do and be OK with that as VCs vary widely on their criteria which can be affected by many things, some in your control, many not so much.
With the answers to these questions in hand, you should have a very good sense of the likelihood of next steps or an investment. With issues around fund dynamics, you’re not likely to change that (unless you are a 9 or 10). For the areas to improve, keep the investor updated when you make marked progress in these areas, usually around customer traction, shipping product or team additions. Regardless, this dialog has demonstrated that you have an interest in them, that you can ask specific questions and understand how the relationship might blossom.
I vividly remember my first VC meeting like it was yesterday, even though it happened over 10 years ago.
I was awed and intimidated to meet an industry insider, someone who with a single decision could transform my business prospects. I prepared for weeks, polishing my deck, practicing my talking points, and rehearsing answers. I couldn’t sleep the night before I was so nervous, anxious, and excited.
For the past year, I had sacrificed an incredible amount to build my business. I had quit my consulting job, I had spent almost all of my savings, I was sleeping sporadically and not enough, and I had spurned social events and family obligations. In other words, I was living the startup dream and loving every second of it.
But that didn’t make the sacrifices any less real. I had put it all on the line and I was now about to meet with a VC who could make it all worthwhile. The magnitude of the meeting was huge for me.
I got to my meeting a full hour early and waited in my car. As I counted down the minutes I day dreamed about all of the incredible ways the meeting would go. I finally walked out and made my way up to the office. When I got there a very friendly person walked me over to a conference room where I set myself up. I expected the meeting to start on time, but the partner was 20 minutes late. He was cordial and nice, but clearly wasn’t nearly as excited to see me as I was to see him.
The meeting started and I began my perfectly rehearsed presentation. I hadn’t finished the first sentence when the VC interrupted me with an idea. I hadn’t even said what I was working on, yet he already knew how to improve my business. He pontificated for a full five minutes and then let me continue with my presentation. Within one slide he was already tuned out.
At the end of the meeting, he told me all of the reasons why my business wouldn’t work, why my concept was obviously terrible. He then highlighted all of the brilliant companies in his portfolio and why they were so much better than mine. We parted ways with him asking me to stay in touch.
I left feeling like I had been punched in the stomach repeatedly and then kicked for good measure. The entire weight of failure fell on my shoulders as I grappled with what had happened. I was prepared to be told no. I knew VC’s say no to 100 businesses before they say yes to one. I knew it was my very first pitch and that I would get better. I understood the odds were widely not in my favor. And yet, I hadn’t expected this.
The meeting felt the way I imagine an artist would feel if someone not only didn’t appreciate his art, but went out of their way to criticize every last brush stroke without ever looking at one of his paintings. Why couldn’t he have just said it wasn’t for him? Why couldn’t he have just listened and then given me feedback as to how I could improve my business or my pitch? Why did he have to make it so painfully obvious that he had no interest in my business and zero respect for me.
Ten years later the memory of that meeting is still vivid, but I think I have a much better perspective for why it was so painful and what I hope VCs consider as they reject entrepreneurs.
First and foremost there is a massively asymmetrical importance to the meeting. To the VC, the meeting is just another one of many in the day, to the young entrepreneur it is THE meeting. Every word you speak he or she will hold onto for years (and they may even write a blog post about it 10 years later). More importantly, entrepreneurs make massive sacrifices to build their business. It might not be a great business, they might not present it well, and they maybe have zero chance of actually succeeding, but as humans they have worked tirelessly, tried hard, and built something. If nothing else, I hope VCs can respect and empathize with the incredible work and dedication it takes to be an entrepreneur.
At the end of the day VC’s have a hard job. They have to say no over and over and over again. That can easily desensitize someone and make it hard to have the level of empathy required for the job. Fortunately there are many VCs who are exceptional people who treat every entrepreneur well (I know firsthand because I get to work with incredible VC partners everyday at Sense360).
That said, I still come across VCs who lack basic empathy when they deal with unknown entrepreneurs. They are late, they check email constantly during the meeting, they pontificate, they interrupt constantly, they don’t respond to emails, they don’t follow-up after the meeting, they are unnecessarily harsh in their criticism, and many other bad behaviors. I really hope that the next time they reject an entrepreneur they consider the sacrifice and hard work the person across the table put in. They don’t have to love them, their idea, or their business, but remember that the founder probably slept on a couch, spent their life savings, and risked a lot personally to try and make it happen.
Hopefully every VC can at least respect the commitment and love for entrepreneurship.
Read the original article on Medium. Copyright 2016.