You should be doing the exact same thing. Learn as much as you can about your potential investor. The relationships you might be starting can last longer than the average marriage. And they may be harder to get out of than the average marriage.
If you're a smart company founder, you'll do the same kind of due diligence on VCs as we do on you. And perhaps to your surprise, when an investor finds out you're kicking the tires, he or she will probably give you extra credit for being sharp and doing your homework before making crucial decisions.
The VC-founder relationship is meant to be a long-term working relationship that benefits both sides. If the fit isn't right, there could be big problems down the road.
Here are some tips on how to perform due diligence on the venture capitalists who might fund your company, to ensure that you are the right fit:
Talk to other company founders.
A lot of investors really like the deal-making part of the job more than they like the executing-on-ideas part. Is your VC going to run off to a golf resort in the Bahamas after signing the term sheet, instead of digging in for the hard work ahead?
This VC may make a great partner when things are going well, but what about the tough times? Few people can answer these questions like other founders who have worked with the same investor.
Other founders have valuable insights for you, and VCs shouldn't mind if you seek them out. If they do, that should raise red flags.
Ask for introductions to an investor's network.
VCs add a lot of value aside from funding. One of the most important things we do is introduce company founders to people who can help their business grow.
At my firm, we make introductions like these before we agree to invest in a company, so we can demonstrate the type of value we bring before anyone starts talking terms. It also allows us to better understand the potential of your business and how you manage partnerships and sales relationships.
A good rule of thumb is to ask your potential investor for three introductions right after they've heard your value proposition. Then judge whether the people you meet can offer genuine help.
Ask the right questions.
Ask questions that reflect your needs and values, and maybe some questions to which you already know the answer. What does this VC's response tell you? Can this person break out of sales mode to give honest answers to serious questions?
Too often, investors tell entrepreneurs whatever they want to hear. A good investor who will make a good partner is more concerned with being respected than being liked.
This should be a long-term relationship, so determine if an investor can act like a real partner. Partners sometimes disagree, and they shouldn't just tell the other what he or she wants to hear.
Discuss the game plan in detail.
The financial arrangement is just the first thing founders and VCs need to agree on. There's plenty more, so figure out if all parties involved have the same game plan.
Are you in it for the long haul, or hoping to be acquired by a larger player? Should the founder stay on as the CEO of the company, or step aside for a new CEO?
Just because you agree on the financial terms doesn't necessarily mean you agree on the longer-term outcome of the company. Your desired outcomes in respect to leadership, strategy and end-game should match your investor's desired outcomes. Find out as soon as you can whether you agree on all goals to avoid unnecessary conflict.
Read the data.
There's a lot of information to pore over as you get to know your potential investor. Find out if the VC has a good track record of syndicating and can bring additional capital to your company.
Find out how many deals this investor signs annually and determine how much bandwidth this person likely has for your company. Analyze the trajectories of the companies this investor has backed.
Make sure this investor has a record not just investing in technology companies, but in companies that operate in the same space that you do and navigate the same problems that you will face.
As an entrepreneur, you don't have time or resources to waste on anything. Picking an investor who is not the right fit is the type of waste you can't afford.