This is a precursor to the Example Investor Pitch, 2012 version, that will be posted next week (yes, I’ve been promising that for year now).
Pitching investors is part art and part science. The goal here is to make the science part well understood, dissected and discussed. The good news is there is real learning to be had after giving and getting about 1000 different investor pitches over the past 10-15 years.
One of those lessons is the benefit of asking questions of the VCs themselves. It’s hard to switch from pitch/sell mode to asking tough questions and putting yourself in the mindset of a buyer – which you are: you’re shopping for cash with your start-up’s equity. And it’s never been more important to understand the VC business, the fund, and the attitude of the firm that you are going to partner with on your start-up.
And remember that VC firms are (almost always) partnerships which means that, in general, it really helps to have broad consensus across the partnership that an investment should be made. To the extent that there is not consensus, the partner wanting to do the deal will have to “do work” to convince the other partners. These questions should help you understand how inherently aligned you are with a particular firm.
With all that in mind, below are a set of questions (and associated explanations) that you should consider asking both BEFORE and DURING a VC pitch. They’re all “fair game” and none should be considered too invasive by any good VC firm.
Questions to ask before a meeting
Who will you be meeting with? Associate? Partner? General Partner?
Especially in larger firms, there is a well-defined hierarchy that is important to understand because of the analysis and decision-making processes within VC firms. General Partners (GPs) are the most influential decision makers at a firm, Partners are a notch down and associates are typically the entry-level position in a firm. Of course, the goal would be to meet with a GP if at all possible; that said, it’s unfortunately uncommon to get a firm’s GP in a “first meeting.”
Many times, associates proactively reach out to companies in specific market segments and start-ups in a particular category; they also do much of the front-end company and deal analysis. The one sentence summary is that they can say “no” but rarely can say “yes” when it comes to their firm making an investment.
Quick sidebar: how to handle inbound calls from a VC firm
Some firms have a staff dedicated to outbound calling every company in a particular market segment for the purposes of generating market research, analysis and deal flow. When your start-up receives a call “out of the blue” from a VC firm – this is probably what’s happening. Don’t be overly flattered because you’re probably one of 25 companies that have received a similar call.
First, ask who you’re talking with and their title; ask why they’re calling and who else they’ve called. Second, don’t feel obligated to give out any information that you wouldn’t give to someone cold-calling from Techcrunch or GigaOm. Finally, if you’re in the process of raising or thinking about it soon – tell them and ask to set up a meeting with a larger group or to meet in person the next time you’re in their geography. No decision will be made on this basis of this first call…so more exposure to a broader group is the goal.
If the firm is reluctant to set up a follow-on meeting – then they’re probably just investigating at this point – don’t waste any more time with them.
What is the firm’s investment focus? Market segment? Geography? Stage?
Some firms focus on particular market segments or specific geographies. Some firms want to be the first money in a deal and others only invest after the first “one million dollar quarter” as been achieved. Inquire as to the firm’s focus when it comes to market segments and stage of company.
It is common for a VC firm to prefer to have a “local partner” when they’re investing in a geography that is a plane flight away from their home offices. This is a form of “security blanket” for the out-of-town investors because they know that a local investor partner would be able to help the company more frequently.
Clearly, if they are not focused on your market, geography or stage, it may not be worth your time to meet with that particular firm.
Are there related investments? Competitive? Complimentary? Partners? Acquirers?
This is a logical follow-on question if the firm likes and invests in your market segment. They may have a competitive or complimentary investment that are important to know about before you pitch. At the very least, this will tell you how familiar the firm is with your market – which can make your pitch MUCH more focused and detailed because they already have the market context.
Clearly, if the firm has a competitive investment, it’s probably not a good idea to meet.
Do you lead? Do you follow?
This question is really simple but very important. If the firm you’re pitching doesn’t lead, you’re not done even if they want to invest. A lead investor prices the round, sets the terms of the deal and generally makes the majority investment for that financing. Many firms are happy to lead the investment – but some don’t. And you need one in order to raise this round of financing.
Similarly, some firms won’t follow other leads. In other words, they want to be the lead investor for one reason or another. There are always exceptions to this rule but understanding the firm’s basic philosophy is helpful. This particular philosophy is usually related to the ownership a firm targets for each investment (see below).
Questions to ask during or after the pitch
How much time do I have?
Always a good place to start; you may get a couple of different answers based on how many people are in the meeting. In general, I suggest you pitch to the time frame of most senior partner and use any remaining time with anyone who has more time to fill in details and context.
What is a typical investment size? Do you have a target ownership percentage?
This is related to the next question (fund size) and a good way to calibrate the potential fit with this investor. Depending on fund size and the firm’s investment philosophy, there will be a minimum (and maximum) amount of money that the investor targets for each deal.
Understanding how much of your company the VC needs to own to make their business work is really important information and very related to whether they lead and how much they can invest. In terms of ownership targets, most firms want to own 20% – 33% of a company in the fullness of time. That means they don’t have to achieve that level all at once but expect to be able to invest to that level over time and potentially other financings. While firms will tell you that this is never a binary decision point, it’s true that not achieving these targets make the investment much more difficult to get through a partnership. There are some firms that don’t have target ownership percentages; also, angel investors almost never have such targets.
How big is the fund that you’re currently investing out of? When did you raise it?
This is simply calibrating how much “dry powder” the firm has on hand. Big, new funds have different dynamics than small or older funds.
Funds typically have a 10-year life span with new investments being made in the first 3-4 years; if the firm you’re talking to raised it’s last fund 8 years ago, it’s an older fund with less probability of supporting new deals…and the next few questions are really important.
How much have you invested out of that fund so far? How many deals is that?
This will tell you what’s really left in the fund. There are issues with both “brand new” funds (such as new capital calls and when investments can start taking place) as well as with funds that are so old that they basically must be kept in reserve for companies the firm has previously invested in. “How many deals” gives you a sense of how much capital they typically put to work per deal…which is a fine question to ask directly (see above). This also gives you a sense of the firm’s over-all volume. A very low volume means that your company really needs to line up with the firm’s core domain/interest or there is likely no deal to be had.
How many deals have you done this year so far? How many do you expect to do?
This is related to the previous question but starts to consider the firm’s behavior in the current environment…and this is where it starts to get interesting. If the firm does x deals per year and they’ve already done that many, then the investor is really going to need to love your start-up to justify a higher volume than their firm was planning.
How long do you think it would take to close this round if we started today? And would you anticipate any unique “conditions to closing” for this deal?
Closing typical rounds of financing takes time; and, in general, the larger the round, the longer it takes. Even in the best situation, 60 days would be considered blazingly fast. Today, honestly, 3-6 months isn’t surprising. There are many standard conditions to closing a round of financing, such as due diligence. However, this question is trying to get at whether or not there are conditions that might make the financing more difficult than usual. For example, does the VC require another venture firm to participate in the round? Does the VC require some significant new customer traction before being ready to fund?
What other firms / individuals do you like investing with?
A syndicate (the set of venture investors in a single round of investment) adds complexity to any round of financing AND the go-forward board and outcome dynamics for any company.
That said, finding out what other firms this VC likes to invest with in a syndicate is a great way to do two things: first, you find out who you should go talk to next. And don’t forget to ask for an introduction to whoever comes up after asking this question. Second, it is increasingly important to make sure you have a set of investors that get along and have history together. As your company executes through typical challenges, venture firms will be forced to make decisions around their portfolio, funds, and strategy. Trying to ensure that you have a set of investors who have a good relationship and have worked together on other deals can de-risk the negative effects of diverging investor/firm agendas.
…more questions and updates as I can think of them.