Deciding to take outside investment from a VC firm and bring in a new co-owner for your business is a critical decision. Entrepreneurs often want to know how exactly a VC will help once they’ve invested and what could change about the way the company’s board operates and interacts with company management.
VCs can add an important dimension to the collective experience and depth of a “start-up team”. They can also deliver connections and open key doors which accelerate a company’s ability to enter the market and achieve a leadership position. However, its important to know how to assess a specific VCs ability to help and deliver on these key benefits before making a decision. Here are 4 areas to research as part of the process for determing the fit and effectiveness of a potential VC partner in helping to build your business.
1. Ask VCs to explain how they think about your business and be convinced that they have a solid understanding the model and important strategic issues — opportunities as well as risks. Not understanding the details of your business could lead to unrealistic expectations for how things are likely develop and might lead to surprise or disappointment if unanticipated “bumps” occur.
2. Ask VCs for details about their business model for working with companies. Get comfortable that your potential VC partner isn’t over-committed with existing board seats and has the ability to be actively engaged with your company. A robust set of VC network connections isn’t usefull if the partner is too busy to leverage it on your company’s behalf.
3. Ask for references from entrepreneurs and CEOs that a VC is currently working with and has worked with in the past. While these poeple are likely to be generally positive given they were referred by a VC, they will usually be straightforward in speaking about their experiences and describing how a VC reacted during challenging situations faced by the company and will also point to key contributions they feel the VC made in assisting the company.
4. Understand aVC firms culture and make sure it fits. Internal cultures and philosophies at VC firms can vary significantly. Organizationally some are more hierarchical and some are flatter. Some firms are team oriented with multiple partners assisting a company at various times while others can be more individualistic in their approach. Some VCs look to be actively involved while others assist but in a more passive role. Some VCs make fewer investments and focus on each company while some VCs make a larger number of investments per fund and take more of a portfollio approach. VCs can also have different areas of focus or emphasis for adding value to help portfollio companies. Its important discuss these issues with a prospective VC partner to fully understand their approach and motivations.
While each situation is different, researching the above topics will help to identify a VC partner who can be a good match and a supportive partner. Given the multi-year length of a typical investment commitment, its worthwile to go this diligence exercise upfront , just as VCs do for a prospective investment, to be sure there is a strong mutual fit.