Hopefully you will be in the enviable position of being able to select which VC you want investing in your company. If and when that does happen, you should interview your VC just as they are interviewing you. Avoid asking the generic ‘how will you add value’ question and instead focus on these big topics:
-How have you helped current or prior portfolio companies? This question should replace the generic ‘how will you add value’ question (generic questions receive generic answers). Instead your focus should be to understand specific examples of how the VC has worked with its current and prior portfolio companies. Every portfolio company will have had different needs and there will be times when a particular VC’s core strengths weren’t applicable, and other times were the VC added a ton of value. Look for an honest VC that highlights both situations. For instance at DAN Fund, we have built complex financial models for our companies, and we’ve been instrumental in assisting with raising capital and going through M&A. That said, we’re lite in the product/tech department so if a CTO search is needed, we haven’t been able to add much value.
-Can I call some of the CEO’s of your portfolio companies? You should not only ask to speak with more than one CEO, but you should also be allowed to pick at random who you want to talk with. This is the best way to really learn what it’s going to be like having a particular VC on your board.
-How do you see the Company growing to an exit? This is a critical question in making sure you and the VC are on the same page. For instance, if your goal is to grow the business over the next 8 years and IPO, but the VC’s goal is to exit via M&A in the next 3 to 4 years, there’s a serious misalignment there. It’s also important to understand the VC’s philosophy: does he/she want to raise and spend a lot of money trying to build a big business, and then figure out how to make it profitable once market dominance has been achieved? Or does the VC prefer to grow at a more reasonable rate with less risk and achieving profitability sooner than later, even though the return in the end may be lower? These are very different philosophies requiring a different timeline, mindset, and volume of capital so you need to make sure you’re in agreement.
Do you do follow on investments? It’s important to know what the size of the follow on is: is it 10% of 100%? At DAN Fund it’s 100%+, but make no mistake, an entrepreneur has to earn that follow-on as we will not throw good money after bad.
Who will sit on my board? Make sure the person you’ve been talking to and have built rapport with is the same person who will sit on your board. Watch out for the switcheroo which can occur at larger funds.