5 Questions to Ask Before Signing a Term Sheet
Startups looking for venture capital often struggle to navigate all the different options out there. How do you find the best VC to help turn your startup into a major player? What do good VCs do that the not-so-good ones don’t? Here are five things to look for when evaluating an investment partner.
1. Can they actually measure and predict their performance?
Scott Maxwell, says that if you want to impress a VC, you should be able to predict the performance of your operating model — have a clear understanding of the model, know your warning indicators and benchmark against other competitors.
This should also hold true for VCs. They need to be able to show you the system they use to track their portfolio companies, look for signs of success and warnings and predict what they (and you) can do with this information. This comes from documenting their own real results, measuring an increase in sales, decrease in sales cycles and opening up new markets for their portfolio companies.
2. Are they experts in their field?
A good venture capital firm will employ people who have actually worked in software and led software companies. In other words, they have some real world experience in the market that you operate in and care about. True experts will be able to help you develop go-to-market strategies, create in-depth marketing blueprints, recruit new talent, train your sales team, help with market research and much more.
And, while any VC can say they have value-add teams and experts on staff, there are only a handful of firms that actually follow through. Just as VCs do their due diligence, startups need to check references too. Be sure to speak with a firm’s existing portfolio companies to see if all that talk actually translates into action once the term sheet is signed.
3. Do they provide a quick response?
This may not seem like much, but when you’re trying to run your business and you need help from your VC, you want to know you’ll get the help you need when you need it. If you want to test a VC firm, email someone at the firm (whether that’s the Associate or Partner you’re interacting with or someone on the value-add team) and see if they actually respond. If you email someone in a VC firm, you should be able to get a response back in fairly short order. After all, their goal is to help the portfolio succeed. If they’re not doing that, you really can’t be sure what they’re doing.
4. Do they recognize their weaknesses?
In a recent blog post I noted that one of the five things great entrepreneurs do is recognize their own weaknesses and work to overcome them. They see their problem areas and they’re willing to fix them. It’s the same with a VC. If the VC has a hole or gap in their core competencies, they’ll work to close it up by hiring professionals who have the necessary skills and experience to solve the problem.
5. Finally, are they intellectually curious?
If you’ve never met with a VC, be prepared to answer a lot of questions. A LOT of questions. Think of a time when you were peppered with questions fired at you from all directions. It’s like that, only more intense. They should want to know a lot about you, your company, idea, market, competition and be willing to go beyond the superficial.
As one of my partners, Blake Bartlett, said, “Much of a VC’s time is spent meeting with people who all make big, hairy, heavily-biased claims…Taking everyone at face value is a recipe for disaster — competitors bash their rivals, startups minimize the threat of an incumbent, executives inflate their departments’ achievements and customers can be over-eager early adopters on one hand or stubborn hold-outs on the other…You must ask “why” over and over until you have enough dots to connect.”
When you’re looking for a VC, you’re looking for a partner whose mission will be to help your company grow and succeed. The good ones will help you grow by providing you with as much talent, expertise and work as you can handle. The not-so-good ones won’t. Find a VC that knows what they’re doing, can prove it and has the experience and knowledge to help you meet your goals.
It’s not an easy decision, but most important ones in life aren’t.
We hope this framework makes planning during this uncertain time feel less like summoning a crystal ball and more like navigating with a map.
In this environment, it doesn’t matter if you’re the CEO of a startup or a well-established company—you’re going to have to make some difficult choices that will probably keep you up at night.