A while back, fellow entrepreneur Aaron Schwartz and I sat on a panel at NextSpace, a California co-working community in Berkeley, where we shared the stage with venture capitalist Michael Berolzheimer of Bee Partners. The panel discussion focused on the mechanics of raising your first round of financing.
During the discussion, Berolzheimer listed a set of questions that every entrepreneur should bring into an investor meeting. Here’s a recap of what we learned and it is applicable to most companies seeking seed-stage investment:
When was the last time you made an investment?
Seed stage VCs should be making investments, actively. If the investor hasn’t made an investment in the last three months, they might not have money to invest and could be wasting your time. Unfortunately, quite a few VCs take meetings although they lack funds. You can use tools, like Mattermark, to get information on an investors’ last investment prior to the meeting.
What is your typical bite size?
Investors typically invest different amounts; some invest $25K-100K and others might not write checks smaller than $250K. For instance, NextView Ventures’ “check size varies but generally falls between $250K and $1M per investment.” Before wasting your time, research the investor’s typical investment size. You can use Angel List, a community of start-ups and investors who make fundraising efficient, to look at investor’s typical investment sizes.
What is your decision-making process?
Investors can have very different investment processes. Some may make a decision after one meeting, and others may take five meetings without making a decision. Ask the investor about their process. If they hem and haw, get out — it’s not worth your time. Getting an early “No” is way better than getting no answer. Raising money can be a full-time job for a founder, so learning about an investor’s processes will help you know what to expect.
Who do you co-invest with?
If an investor has committed, ask who he or she co-invests with. Warm introductions from an investor can be incredibly powerful — since they are putting their money and credibility on the line. The referred investor then knows it must be a worthwhile deal. If the investor has a network of “co-investors” in general, that’s a good sign. One caveat: If an investor passes on your company, don’t ask for introductions to other investors. An introduction from an uncommitted investor can send a negative signal.
How does our business fit within your portfolio?
Of all the questions on this list, this is the easiest for you to research ahead of time. You might find that no other businesses in the portfolio are similar to yours — in that case, get ready for a quick meeting! Similarly, if there are a lot of businesses similar to yours, you might run into a conflict. In general, you’re looking for the “just right” portfolio — one with analogous companies that might share a business model, but no (or few) direct competitors.
How do you interact with founders after investing?
Some investors are hands on, some will make introductions to their entire network, and some will do nothing — know what you are getting into! As Steve Blank explains in a Fast Company article, “Today, you sit in a board meeting and people are on their iPhones and BlackBerrys. There are times where I have seen VCs do this to entrepreneurs and I want to take these gadgets, open up the f**kin’ window, and throw them out. ‘Your time is not anymore valuable than mine. All you got is money, obviously not brains.'” While not all VC and entrepreneur relationships are doomed it’s important to understand how they’ll manage the relationship before you say “I do.” It’s important to remember that, “Most entrepreneurs need angel investors or VCs to succeed. Similarly, angel investors and VCs need entrepreneurs to succeed. Angel investors, VCs and entrepreneurs are all part of the same entrepreneurial ecosystem.” (Angel Blog)
There are no right answers for any of these questions. It’s important that you know what type of relationship you’re entering. Your investors are going to be your partners for the long-run. Most startups focus on ensuring that an investor understands the business. It’s equally important that you vet the investor to make sure she fits with your goals.
This article has been edited and condensed.
Bhavin Parikh is CEO and co-founder of Magoosh, a company that creates web and mobile apps to help students prepare for standardized tests such as the GRE and GMAT. He loves advising startups on growing their ideas and building great cultures. This article was co-authored by Aaron Schwartz, founder and CEO at Modify Industries, Inc., which designs interchangeable custom watches known as Modify Watches. Connect with @bkparikh and @MosesOfWatches on Twitter.
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