VC - Looking under the hood

Over the past couple of months, I’ve had a steady increase in the number of 30 minute, no harm, no foul meetings with start ups, people thinking about doing a start up and people diving in to the murky world of trying to raise capital.

I try to do more listening then talking while at the same time answering as many questions as I can. 

One of the more frequent questions that pop up is:

“How can you tell if a VC will be ‘right’ for our company?”

Here’s a synopsis of the answer I’ve been giving to people.

There are, of course, the obvious things.

1. References.

I suggest you get the names of the C level folks of current/past investments. On the surface, you might think that most portfolio companies are going to be “politically correct” when giving you feedback. Actually, once the money is in, it has been my experience that you get fairly good data.  The real key is asking these types of questions:

– How much do they know about your space?

– What happens when they disagree with strategy? 

– Describe a typical debate?

– What are board meetings like in terms of being productive?

The second set of references you should get are some of the limited partners who have invested in the fund. It’s an interesting way to get a perspective on the due diligence done with respect to the venture firm.

I’ve gotten some feedback that said a number of VCs ‘don’t do references’ and my only response to that would be, there you go, all you need to know about the firm.

2. Playback.

Most of the time when I am looking at a company, I will at some point, give a presentation to the potential investment’s C level guys about what I think I heard, what I think the vision is, and what I believe the story is.  In effect, it is a reverse pitch. I pitch the C level team on the opportunity for several reasons:

– They get to see me in the ‘hot’ seat. It’s not much but it is always nice to be on the other side listening to somebody suck up to you!

– They can see if I get it. In the spirit of Brad Feld’s cough up more mistakes, I’ve screwed this up more times then I’d like to admit.  I’ve listened, studied, and gone back to the team with my version of the Kool-Aid, only do get it really wrong.  It’s embarrassing, somewhat, but more importantly, it allows all of us to immediately see if I’m in sync or trying to be the poster child for “dumb” money.

– They get a sense of what I view is important, a priority, the revenue source, timing, etc.  This is important because nothing gets a founder more annoyed then to get a check and, a week later, have a board meeting to discuss changing the strategy.  I’ve had my share of folks in my office livid over this scenario, trust me, it happens all the time.  This happens because people tend to gloss over that paragraph in the term sheet about agreeing on strategy.  Get the VC to play it back to you, i.e. get the potential investor to ‘pitch’ you on what they’ve heard. 

Finally, don’t get trapped in a time crunch.  There are some amazing people out there who truly love what they are doing with respect to Venture Capital and start ups. Guys/Gals like Ann Winblad, Fred Wilson, Brad Feld, Jeff Clavier, Peter Rip, Jeff Nolan, and others, will give you the most important thing you can get besides money. Time.  In addition, guys like Don Dodge over at the mighty M, are also generous with time.  Reach out to these folks, and others, to gain valuable feedback on this part of the process. It will be well worth your time.

Start early, keep potential investors updated with meaningful progress reports and enjoy the ride. While some people view raising capital as just above getting teeth drilled, I would observe that there are lots of us out here that don’t subscribe to all the nonsense and hoop jumping rather: we just love companies.

Give us a call.

note: I don’t have links to the people mentioned cuz this is on the RIM, sorry.

Comments

[Dharmesh Shah]

Excellent article. Thanks.

One of the thing that makes it difficult for entrepreneurs to look under the hood is that the balance of power usually seems very asymetrical. Most startup founders raising VC money do not feel they have enough power in the relationship to do as much due diligence as they likely should.

[shel israel]

First off, Rick, that's mighty good typing for a Blackberry. I say "two thumbs up to you." Second, in my years of working with startups, before, during and after their first venture rounds, I don't think you can overlook chemistry. I have seen too many entrepreneurs feel burdened by their relationships with their boards. I have had too many VCs take me aside and tell me how they are counting on me to provide adult supervision to "these kids." My cheap advice: (1) Don't take money from people who make you uncomfortable. (2) Don't give anything more than pocket change to teams you consider to be"kids."