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More in the 50 Questions Series50 Questions: What are the five biggest pitfalls to avoid during negotiations? | 50 Questions: How do VCs make investment decisions? | What is venture capital? |
50 questions: What makes a good investor?
Together with Nic Brisbourne of The Equity Kicker / DFJ Esprit, I am writing a series of 50 questions you should ask when raising venture capital. We expect the series to run for a year, after which we will collate the answers into a book. We view this as a collaboration, so please comment to help make this series even more useful. This is #20 in the series.
Raising venture capital is a sales process. It is also a buying process. You are building a long-term relationship with a partner who will be with you for half a decade or more, sharing vital financial decisions and the highs and lows of entrepreneurial life.
It makes sense to find a good investor, doesn’t it?
You need to get on with your investor. You need to like them, trust their judgment, be happy to spend time with them at conferences and during tough negotiations. If you find yourself thinking, “I’d put up with him for a couple of million quid”, you are storing up a world of trouble.
Who is actually committed to the project? If you are in the lucky position of being the hottest start-up around, you might have well-known VCs beating a path to your door. But even if you do, who will actually attend?
During the last dot com boom in 1999-2001, investors poured money into hot startups. One of the hottest was boo.com, a ludicrously-ambitious, technically naive fashion business that raised $135 million, spent it and went bust within 18 months. The investors were the great and good of the European business scene (not always professional investors), but in that febrile environment, few of them attended board meetings in person. BBC Tech correspondent Rory Cellan-Jones wrote an excellent book on that era, Dot Bomb, that revealed how many of the investors dialled in to board meetings from airports or between meetings, paying little attention to the details of running the company.
Is that the kind of investor you want when the going gets tough?
An understanding of your sector matters, but not as much as you might think. What is much more important is their track record of helping companies through the difficult inflection points: experimenting with different business models; pivoting; hiring senior and middle management; handling slower-than-expected (or faster-than-expected) growth.
It can be hard to get this understanding just from meeting the VCs, so it is worth doing some due diligence. Mark Suster has some marvellous advice on doing due diligence on potential investors over at his blog. I recommend it highly.
A strong fund
The previous points have focused on the individual, but the fund matters too. How close to the end of its lifecycle is it? Does it have appetite for further investment? If it passes, what does that mean for follow-on rounds? Do you have only one partner who likes what you do, or are the other partners equally committed?
Is there a checklist?
It would be hard to give a definitive check list, but here are some things I would consider:
- Personal: Do I like them? Can I work with them for a decade?
- Trust: Do I trust them? Do I respect their opinion, even if I don’t agree with it
- Reputation: What do people who have worked with them say? Are they known as a good partner by people I know/respect?
- Financial strength: Can they follow through?
- Commitment: Are they investing because my sector is hot, or will they stick with me through the tough times?
- Knowledge: Do they understand what I am trying to achieve?
- Complementary?: Do the investors bring something I don’t have (other than money)?
Got other elements you would add? Let me know in the comments.
Hungry for more? Go to the 50 questions homepage for more insights into venture capital.