Don’t be Afraid to Ask the VC Tough Questions

January 26, 2011

I’m starting to use Quora to find the most interesting questions that early stage software CEO’s have top of mind, at least when it comes to venture capital funding. Here’s another question I responded to on Quora.

What questions do entrepreneurs want to ask venture investors most, but are too afraid to ask?
Now I’m assuming here that we’re talking about questions an entrepreneur who is raising funding is too afraid to ask from an interested investor.

What I can say from the investor perspective is that you should not hesitate to ask any of the questions you want to. Getting funded is a really, really big deal for your startup. You should not be raising from a VC with whom you can’t have an open and honest conversation. Raising an institutional round of funding is like getting married. You are giving away a large portion of your business and allowing a partner to move into your business and be a large influence on its direction. Like picking a life partner in marriage, you need to pick an investment partner who shares your aspirations for the business, who shares your values and culture, and who will stick by your side through thick and thin.

Part of the fund raising process has to involve you asking the VC tough questions. I can understand that being desperate for funding may force you to take on money from an investor you don’t like. But, trust me when I say, that more often than not you’re better off not raising. Once an institutional investor is in, he is really hard to kick out.

So what are the basic questions you need to be asking any perspective VC investor?

  • Questions on fund solvency are a must. You do not want to find out about your investor being insolvent after you raise. The key questions are: what is the size of the fund you would be investing from? How much of it have you deployed? What is the average size of your first round investments? How much would you be allocating to investing in our company? What you’re looking for here is a well established fund with enough available in the fund for follow-on rounds.
  • Ask for specific examples of value brought by the VC to a portfolio company. Don’t settle for a partner who has experience in your space as the only value. Ask about whether the VC firm actually has resources that would roll up their sleeves and get work done for you. A great example of this is the infrastructure we built in our consulting team There are investors that add value, and there are investors that don’t. They ALL say they add value, they don’t all do.
  • Don’t ask for a reference call with a portfolio CEO: just cold call them without telling the VC. The VC will be doing the same when they diligence you and your company. You should do the same. The key here is to find out how the investor behaves when the going gets tough. Don’t assume that changes in founding CEOs are a bad thing. What you want to find out is how the investor behaved in managing these kinds of transitions.
  • For the partner who will be doing the investment, ask about his/her bandwidth. How many boards does he serve on, and how many more will he be taking on? Will he bring in a more junior person to take his seat? How much time will he allocate to you beyond the board meetings? There are many examples of super star investors doing the sell part of an investment, and passing on the baton to a more junior person post-investment.
  • What are your returns expectations? Are we totally aligned in how far and big we want to grow the company? How long are you willing to wait for us to get to an exit? What if the investor is looking for a 3x return in 3 years, and you are aiming for a 5x return in 5 years? The key is to make sure you and the investor are in synch when it comes to how many years it’s going to take to get to the exit you’re collectively looking for.
  • What was the toughest portfolio company experience you went through? How do you work through these tough situations? How many times have you been through CEO changes in your companies, and how did you arrive to that change? The key here is to find out how the investor behaves when the going gets tough.

Essentially, you should be asking all these questions of each perspective venture capital investor.

We at OpenView Venture Partners are committed to delivering extreme hands-on operational support to each and every portfolio company. As partners, we spend quite a bit of time diving in with the early stage CEO helping him/her build the business.

The Chief Executive Officer

Firas was previously a venture capitalist at Openview. He has returned to his operational roots and now works as The Chief Executive Officer of Everteam and is also the Founder of <a href="">nsquared advisory</a>. Previously, he helped launch a VC fund, start and grow a successful software company and also served time as an obscenely expensive consultant, where he helped multi-billion-dollar companies get their operations back on track.