Tuesday, August 28, 2012

Lesson #119: How to Screen Venture Capitalists

Posted By: George Deeb - 8/28/2012


& Comment

Last year, I shared my definitive checklist for startup success, which included the things you needed to accomplish before approaching venture investors, to increase your odds they will be interested in funding your business. In this lesson, I am going to provide the inverse: a definitive list of things a venture investor should offer you, before taking money from them.


___ What is the firm's track record of success? Have them list their best performers.
___ Does the firm have a "brand name"? Some startups are perceived as being better investment/startup opportunities, if a big name firm is involved. This may help you attract other investors and business partners in the future. But, there are plenty of great lesser known investors.
___ How big is their current fund overall? And, more specifically, how much is still available for future investments. You want a firm with deep pockets, for this round, and the next.
___ Is this their first fund, or their fifth fund? The more funds they have raised over the years, the more successful their investments have been, attracting new capital over time.
___ What business contacts can the firm help make introductions for you? Their Rolodex is often more important than their capital, to help you more quickly open doors to business partners.


___ What is the specific Partner's track record of success? It is less about the firm, and more about the person you will be working with day-to-day.
___ Does the Partner have specific business experience, or only financial experience? It is always better to have the input of another successful entrepreneur who has actually been in the trenches.
___ Ask to speak to references from CEO's of their portfolio companies. Nobody will give you a better sense to the value provided and personality of the Partner, after the deal closes, than these CEOs.
___ Who from their firm will be sitting on your board of directors? Often times the senior Partner who does the deal, is not the more-junior person who will be filling their board seat.
___ What experience does the Partner have in your industry, as not all startups are created equal? Look for domain expertise in your industry and desired go-to-market strategies.
___ What is their personality and style? You will be spending the next five years with this team, make sure you can get along with them (in good times and in bad).


___ Are the investment terms, valuation and deal structure fair and in line with market levels? You can benchmark multiple VC offers against eachother, and research investment terms trends for a business of your size. Only work with firms that you feel are treating you fairly. A good startup lawyer can help here.

I have said this before: not all cash is the same shade of green. So, choose your investors wisely, to increase your odds of long term growth and business success.

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