Hopefully you will be in the enviable position of selecting your VC. If that’s your situation, 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). Your focus should be to understand specific examples of the VC helping 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 BSV, we have built complex financial models for our companies and we’ve been instrumental in assisting with raising capital and going through M&A. We have been unsuccessful referring great personnel to our companies.
Can I call some of the CEO’s of your portfolio companies? You should ask to speak with more than one CEO and be allowed to pick who you want to talk with. This is the best way to learn what about a particular VC. A good VC will not introduce you to their portfolio companies until they’re certain they’re close to a deal with you because they want to use their founders’ time only when necessary. When you’re a portfolio company, you’ll ultimately appreciate the VC’s discretion here.
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 invest a lot of money trying to build a big business? Or does the VC prefer to grow at a more reasonable rate with less risk? Maybe they have a preference to achieve 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. In case you’re curious, our philosophy is more conservative.
Do you do follow on investments? It’s important to know what the size of the follow on is: is it 10% or 100%? At BSV it’s 100%+, but make no mistake, an entrepreneur has to earn that follow-on as we will not throw good money after bad. It’s not automatic, and that’s important to know.
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, and spend as little time as you can talking to Associates. Indeed one of the benefits of dealing with smaller funds like BSV is that you’re generally talking to a decision maker from day 1, not an associate.
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