Choosing a VC firm or other investor for your business is arguably the most critical decision an entrepreneur can make. My venture capital colleagues and I frequently use the analogy that selecting an investor is much like getting married. Except that you can't easily get divorced...
Here are five things to consider when choosing your investor:
1. Recognize first and foremost that you are choosing a partner, not money. People are differentiable, money is not. You need to go in with this mindset and imagine yourself spending significant time with this person. Do you feel a level of mutual connection and mutual respect? On the flip side, always ask yourself the proverbial airport test: if there was a snowstorm and you were stuck at an airport with this person, would you want to pull out your hair, be neutral, or be glad for the unexpected quality time?
2. Assess the specific value-gaps that an investor can help fill and determine his or her ability to do so. Beyond the money, what are the gaps that are slowing you down towards success? Are there critical team members at the investment firm that can help fill them? Partnerships or customer relationships? Does the investor have an understanding of your business model and industry? It sounds obvious, but look for an investor that has a proven track-record and preferably operating experience in an area that is directly relevant for your business model and industry. Entrepreneurs should always consider, 'how connected and how smart is this investor for what it is that I am trying to build and grow?' Whoever or whatever it is that you might need for your business, entrepreneurs should fundamentally consider whether they are getting something significantly more than a new outside investor to help price a round.
3. How much real time and commitment will the investor have for you? Like most things, it is about the person who will be joining your Board or championing your cause, not necessarily the firm making the investment (not withstanding there are certain firm considerations addressed in the next point). Ask how many other Boards the person is serving on, what they expect the communication protocol to be and how frequent a level of interaction you can expect to have. Also important: do they expect to control the volume dial or do you have the opportunity to turn it up when needed? You always want to have the optionality of their ear and their time; the entrepreneur should always be the customer in deciding how much time is needed. Remember to confirm this availability in your diligence process.
4. What is the time horizon for their investment? At our firm, we believe that a long-term focus is always better than a quick exit and we have put in place a permanent capital structure to match that philosophy. Most VCs and private equity firms have a limited life on their fund. One question that entrepreneurs don't ask frequently enough - and we ask as we consider partnering in any syndicate round - is, "in what year of the 'J-Curve' is the fund from which we are receiving investment dollars?" For example, if a fund has a ten year lifespan, it is very different if the partner is investing at the beginning of that investment J-curve than at the end. You want alignment and transparency with your partner and the time horizon of how long someone expects to be in before expecting an event.
5. Due diligence and less traditional reference checking. We always say that a negative entrepreneur reference is a massive red flag. In essence, most reference checks have only modest value because entrepreneurs are only going to give the names of contacts who will say good things. On the flip side, the best VC firms and investors will share not only situations that worked well, but also as important, investment situations that did not turn out as everyone hoped. Ask your investor to share the names of those founders and CEOs. As with a marriage, when things are going well it is easy for everyone to be happy, but when things go sideways or fail, you tend to learn much more about true colors of your partner's character. Do more comprehensive and less traditional reference checking - start from the companies provided by the investor in which situations did not work out well, to even some entrepreneurs whose names were not given to you, and then finally to the known good situation contacts the VC firm provided.