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More in the 50 Questions Series50 questions: What’s the difference between angels, VCs and strategic investors | 50 Questions: How should an entrepreneur approach negotiation of the key terms? | 50 questions: What should I put in my business plan? |
50 questions: If you’re raising money, what questions should you ask the venture capitalist?
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 #29 in the series.
There are two different sets of questions you want to ask your VC. One is to find out whether you are comfortable committing to a business marriage over the next decade, a topic I covered in What makes a good investor?
The other is trying to understand the venture capitalist’s internal process in order to maximise your chances of raising money. What is the best way of doing that?
What advice would you give me?
The less you ask for money and the more you ask for advice, the more likely you are to get both.
This doesn’t hold true in all cases (some investors, particularly government-backed ones) have rigid processes, but asking for feedback on your business so that you can learn, adapt and improve is a sure-fire way to improve your relationship with a venture capitalist.
It is not a sure-fire way to get immediate funding though. I’m a firm believer that investors invest in lines, not dots, and you need to start the dialogue with potential investors 6-12 months before you might start to raise money. So ask for advice. You may disagree with it (and for goodness sake don’t follow it slavishly in the belief that it will increase your likelihood of being funded by that investor), but by the time you’ve had feedback from a dozen investors, many of whom will be experts in your field, you will be a lot better informed about the market, your own business and the pitfalls which might face you.
What do I need to do to get to the next stage?
Nic talks about an entrepreneur he met who ended every meeting by asking “What do we need to do to get to the next stage?”.
It’s a great question, because it both signals your commitment to providing the investor what they need to make a decision AND gives the entrepreneur information on the internal process and hurdles that the person on the other side of the table has to overcome before a deal can be done.
The key thing to remember is that more often than not, the person on the other side of the table is not trying to decide if they want to do the deal. He is more likely trying to work out what he needs to sell the deal to his partners, his investment committee or his investors.
What is your process?
Some venture capital firms need unanimity amongst partners before they can invest. Most (if not all) have investment committees. Some invest on the backs of reams of research and by hiring external consultants to opine on a business. Others (particularly angels), invest on the strength of gut feeling and conviction.
The key is to ask the question: “What is your process?”. In essence, you are trying to find out what information the person on the other side of the table from you needs to get further along the process. Always remember that you are not trying to convince them – if they are asking for more information, they are already highly interested. The key is to help give them the ammunition they need to convince others in the organisation – people who have not had the opportunity to hear your enthusiastic and brilliant pitch first hand.
When can I expect to hear back from you?
No-one likes to be a pushy salesperson, hustling the prospect to close the deal.
On the other hand, you don’t want to let a deal go cold either. Try to leave the meeting or call with a clear sense of what the next steps are, anything that you should deliver, and with a date by which you can expect a response.
That’s not to say that you can’t follow up earlier. But chasing an investor after a couple of days when he’s said he’ll get back to you in two weeks after the partners’ meeting is counterproductive.
What else should I ask?
Your basic objectives are to:
- advance the deal
- decide if you want to work with this investor
Ask anything you need to to help these two objectives along. Ask about talking to other investee companies (if the deal is looking promising). Offer to talk to other advisors/partners/interested parties. Find out the personal hot buttons of the people on the other side of the table.
In the end, there are no fixed rules about what you should ask. The nearest to a fixed rule is this: every meeting is an opportunity for you to learn more about the investor sitting opposite you. Seize that opportunity with both hands.
Hungry for more? Go to the 50 questions homepage for more insights into venture capital.