How to diligence VCs you’re raising from

I tweeted this out last week on a whim and got a lot of DMs asking:

a) who I’d recommend raising from, and
b) how they should go about diligencing VCs to make sure they treat founders well

On 1, feel free to DM me! Send me a brief blurb of what you’re building, what industry you’re in/what companies you consider comps or incumbents in your industry, and how much you’re raising. Happy to recommend people I can vouch for.

On 2, the best advice I have is below. Really happy to see people interested and thinking ahead about this topic because it’s one of the few hyper-permanent decisions that you can’t (for the most part) change later. I messed this up with a previous company and hope to share lessons to avoid other founders having to experience the same headache.

Thank you for the people who messaged me and inspired this topic & some of the others coming up! Coming up in future weeks:

• how to be the hot startup at demo day

• tax/finance considerations for founders/startup employees

• how to choose a startup to work at

• solo founding vs. co-founding, pros/cons & navigating both

It’d mean so much if you shared this with friends who would find this helpful, and if this was forwarded to you, subscribe here. 💕

Without further ado…

TATTOO THIS ON YOUR BRAIN: Diligence the VC firm, but also the specific person leading your deal

First off, make sure you’re equally diligencing the firm, but also the specific partner you’ll be working with / who’s sponsored your deal internally.

Why is this important?

The firm may have a culture that dictates how their partners treat founders, and the firm’s reputation in the industry or among potential hires is also important. However, even if those are stellar, they could be significantly less meaningful or even irrelevant if the specific person you’re working with isn’t great. I go into specifics about how to weigh and diligence both below.

Understanding what a good VC vs. a bad VC looks like

Every VC talks about how they’re “founder friendly”, but what does that actually mean?

Founders want a good VC, meaning:

• they’re responsive - when you need something (within reason), you can expect that person to respond in a timely fashion. (The SVB fall-out certainly showed many founders whether they could trust/rely on their investors)

• they’re helpful - they respond to your asks, make intros where they can (to customers, hires, etc), give you good advice or connect you to people who give good advice, etc. They do what they say they’ll do

• they have decision-making power at their firm - this is an overlooked one. Not all partners are equal, and if the partner that you’re working with doesn’t have as much decision-making power, this could mean more headache for you later. Titles are actually not a good indicator of someone’s power (for example, there are plenty of principals or even associates I know who have huge sway at their firms). This is important not just for the deal itself, but also for the future - for example, when pro rata participation in your future rounds is decided, or if you need firm support/help with something even though they have limited time/resources.

• the firm is well respected amongst your customers and prospective hires - this is the most valuable thing most investors provide, frankly, and especially at the early stages, it goes a long way

• they’re trustworthy and have high integrity - duh 😏

• they’re easy to work with - it’s like a marriage. Hopefully you like each other, lol

I’m sure you’ve also heard about terrible VC’s. Besides being unhelpful/unresponsive, what are the specifics you’re trying to avoid?:

• they’re a huge drain on your time, energy, and happiness - these are the VCs that pester you constantly with calls/messages.requests that create more work for you than provide you/your team value. I’ve seen this from inexperience (an inexperienced investor is paranoid about their performance, and therefore puts pressure/stress on you to provide information and run decisions by them all the time).

• they care more about their financial outcome more than anything else (other people’s financial outcomes, your/your team’s well being, etc) - yes, VCs are investors and that’s their job, but there are short-term games and long-term games. My tweet was inspired by the fact that I’ve seen naive investors play short-term games out of desperation or selfishness. These are things like a) forcing inexperienced, young founders into term sheets that have non-standard, predatory terms (another future post coming on specific ones to look out for), b) using their power (whether legally binding from term sheets or just aggressive/forceful/unpleasant behavior) to force founders/their teams into unideal exit scenarios that benefit their own interests but harm the team’s, or c) shut down early / return money because the VC no longer believes in the company. The list goes on.

• they get scared easily and/or are easily persuaded by other people/macro sentiment - I’ve seen founders get pressured by investors to pivot, especially when the company’s industry is no longer the hot industry amongst other VCs. I’ve also seen the opposite - a founding team wants to pivot because their earlier direction has lost steam, and an investor is vocally upset because they care more about their fund’s exposure to the company/industry they originally invested in vs. the judgment of the founding team. As founders, especially if you believe in your own conviction and mission (which, given the amount of risk/dedication you’re taking, I sure hope you do 😬), the last thing you want is a VC imposing strict decisions on you. A VC who understands that you’re an early stage company with a fair amount of uncertainty and who believes in you in particular is key.

Doing your diligence on a VC

In the same way that VCs diligence founders, this is now your time to diligence VCs.

Now that you know what to look for, here’s how I’d recommend evaluating a VC to screen for the above:

Get to know them and honestly assess whether you ‘click’. You won’t be working with them day to day, but if they’re your lead investor, expect to interact with them in a significant way for the lifetime of your company.

• Do you feel comfortable around this person (would you feel comfortable giving them bad news)?

• Do you get along / do they pass the airport test (mutually)?

Ask them hard questions, like:

• What’s your vision for our company? Why are you investing? (Ask yourself: Does their vision align with mine?) How would you react if/when those don’t align at some point?

• How do you work with your founders? How involved in their companies/decisions are you? How often do you talk with them? What are your expectations for the founders you work with?

• Tell me about a company you’ve worked with where the relationship with the team wasn’t good — what happened and what did you learn?

  • Related — what’s a company you’ve worked with where the company’s outcome wasn’t financially positive? What happened? What was your role in its journey, wind down, etc?

• When have you have disagreed with one of your founders and how was it resolved?

• Have you ever removed a founder from their company? What happened?

• As a partner/investor, in what way do you think you’d be able to help us the most?

Ask for reference checks, but most importantly, do your own (especially with founders whose companies didn’t outperform).

• Every partner should give you reference checks for other founders they’ve worked with if you ask, but I would take these with a grain of salt (especially if the partner you’re talking to is senior and they have a large portfolio). Like with any reference checks, these are cherry picked to be the best ones.

• Do your own backchannel-ing, prioritizing founders who’ve worked with the same partner and founders whose company didn’t financially outperform. These will give you the best perspective, especially the latter. It’s really easy for a firm to treat founders well when they’re killing it — people’s true characters come out in hard times, so I would seek those founders out especially since it’s more than likely you’ll encounter hard times at some point in your journey.

• If in your own research (firm’s website, news stories, Pitchbook/Crunchbase, etc), you find other founders who you want introductions to, they should be fair game & you should feel free to ask for them. If they’re reluctant to intro, that’s a yellow flag and I would especially make an effort to backchannel.

• Other VC’s (who don’t have a conflict of interest - make sure) can sometimes help. VC’s commonly co-invest and sit on boards together, so that could be another avenue for getting more insight.

• Founders who’ve worked with the same firm are also helpful, but I would say experience with different partners can be extremely varied, depending on the firm & the seniority of the person (see next point)

Diligence the partner’s influence within the VC firm you’re speaking to.
I don’t think this is a dealbreaker if everything else is positive, but I do think it’s a worthy, commonly overlooked consideration. Working with a partner who has decision-making power within their firm is extremely beneficial - especially when you’re looking at a long-term relationship where you’d hope they’d continue to support you throughout your company’s life. If your company kills it, this doesn’t matter as much - the firm will still support you. However, if your company ever goes through tough times and needs a bridge/ pro rata investment to secure a lead, getting future support is significantly harder without a strong point person internally. Diligencing this is tricky, but here are some things to look out for:

• How senior is the person and how long have they been at the firm? If they’re not that senior, do they have a strong senior point person mentoring them/sponsoring their investments? Has this person lead a lot of other investments for the firm, or are you one of a few? Does this person have a track record of getting future support (pro rata, markups, etc) for their portfolio companies? (This signals that the person is likely to be around the firm for a while and has influence internally.)

• Is your company’s industry core to the firm’s thesis, or are you part of a smaller focus area? (i.e. say a firm’s core focus is consumer, but you’re a deeptech company — rule of thumb is that the ‘core focus’ usually takes precedent over non-focus areas, which may impact their future support especially if your investment was controversial amongst a partnership).

Summary

This is one of the most important decisions you make for your company, especially because it’s permanent and impacts your happiness/wellbeing/willpower so much. Take it seriously.

• Diligence not only the firm, but also the person.

• Make an effort to get to know the person and ask them hard questions.

• Seek out founders who has worked specifically with the person you’re talking to, and especially seek out founders who didn’t financially outperform.

• Diligence the person’s influence and position within their own firm to understand what kind of support you can expect in future rounds

Thank you for reading! Please subscribe, forward this to anyone you think would find this helpful, and/or shoot me feedback or ideas for future pieces if you have any.

<3,
Steph