Our favorite VC blogger, David Stern of Clearstone Venture Partners, contributed four hardball questions to ask funds that you are pitching on his blog. Since VC's are strictly not allowed to post at TheFunded, we have re-purposed the advice, which is very insightful stuff. Don't forget to ask these questions in your next meeting. Enjoy!
1. Do you sit on boards" This is a crucial piece of information most entrepreneurs never ask. Honestly. Maybe 1 in 20 have asked me that. Why is that important" It is important because unless you are meeting with someone who does, you aren't meeting the right people in the firm. And while that is fine for an initial meeting or two, entrepreneurs need to know that moving a deal forward in any firm means moving to meetings with people who sit on boards. That isn't to say that those who don't aren't important. But as a general rule, until you get to someone in a partnership that does or can, you haven't made enough progress. Caveat: Some of those in firms that don't sit on boards, also have an enormous amount of clout within a firm.
2. Can you introduce me to 2 or 3 entrepreneurs you have worked with" Can you introduce me to entrepreneurs you have backed that have failed" Ok, this is a two part question, but both are important. The first question should be essential due diligence for every entrepreneur. Why don't entrepreneurs, especially in a market where good people and good deals are in short supply relative to the number of firms with a ridiculous amount of capital to deploy, ask these questions" Knowing how the partner you are meeting with interacts with other CEO's is essential. And even more essential, in my opinion, is finding out from failed venture backed CEO's, how the firm handled itself in those cases (and the partner in charge, if he's on your company). Knowing how people react in times of failure I believe is more dispositive of true character of a firm and a person than knowing how someone reacted when the company they backed was acquired by Google. And oh, by the way, the entrepreneur that has the guts to ask this question, gets extra points with me...it shows confidence. And that sells!
3. Where is the firm in its fundraising cycle/capital deployment" Again, another question I've been asked only once. Is this important" You bet your payroll this is important, because you just might be. Even before I'm contacting firms, if I'm an entrepreneur, I'm looking to see what firms from the outside, look to have dry powder in their fund. Why" Well, let's just say that from a investment professional's perspective, HEARING a great pitch without a lot of dry powder is like going to In-N-Out Burger on a no fat diet--there is no payoff! But make sure if you ask this question, that you not make the wrong conclusions. Every firm handles fundraising/low powder in different ways. Some look to invest in later stages the later on in their funds that they are, some continue to invest early, some sit quiet while awaiting first closes of their next funds. And for many funds, it isn't an issue at all. But, the point is, make sure you ask the question and consider the context around the answer. History is useful here to establish context to inform your thinking about whether there is a fit or not.
4. What does the funding process look like for companies that have been successfully funded at your firm and what does it look like for companies that haven't" This is pretty obvious, right" Ok, maybe it is, but again, how come I'm never asked this" And it's verifiable. Shouldn't you ask to speak to company CEO's that have gone through the process with the firm, so that if there is a variance, you know that a funding event is unlikely or more likely to happen" Look. Every firm, and every investment professional at firms, acts differently. Their processes are different. But you should know that upfront. PRIVATE: