Are they going to waste your time?
How much time should you be spending with them, versus the rest of those in your fundraising funnel?
I hope founders remember that they have something awesome, and investors are lucky to get to come along for the ride, most of the time. With that in mind, you need to be prepared to vet potential investors even while they are conducting diligence on you and your business.
Your time, especially when fundraising, is very valuable
I see what I consider “time waster” investors more often in tier 2 and 3 ecosystems (where I spend a lot of my time), but they do exist on the coasts as well. I’ve met plenty of time wasters at top accelerator demo days, so don’t be fooled when you’re in Mountain View, you can still run into folks who will waste your time.
Obviously, there are some VCs who have great reputations, and long standing track records, so you don’t need to insult them with a question you can easily answer by looking at their website or Crunchbase profile. However, with the increasing number of Angels and Micro-VCs out there, I thought a list of qualifying questions would be helpful when the answers aren’t readily available.
Please, also note that you should be tactful about how you ask these questions. This list below is what you need to find out, it doesn’t mean you need to ask these exact questions, in rapid fire succession during your first meeting with a VC. Your goal is to gather the information you need to answer these questions and often that can be done indirectly, but don’t be afraid to ask some of these questions directly as well. Be smart about it. Use your network, and all available resources first.
1) What is your average check size?
If someone is slow to answer, or dodges this, or it sounds like they don’t know off of the top of their head, then they likely aren’t consistently investing at the early stages. Investors who are active, know this number because they get asked for it all the time.
2) How much dry powder do you have or how much time is left in your current fund?
This question is for institutional funds, not angels. It can tell you if they are looking for shorter duration investments (maybe they are in year 7 of a 10 year fund), or if they do or don’t have capital for future rounds, etc. Sometimes this can alert you to an investor who is just taking the meeting to stay in the flow while they are out fundraising themselves, which is a waste of your time, in many ways.
3) What investments have you made in our space?
Even if they haven’t invested in your space (B2B, B2C, Esports, Fintech, East coast, West coast, etc.) they should have thoughts about what they like and don’t like. The specific answer here isn’t that important, but the lack of a well thought out answer should be alarming. For angel investors, you may want to direct this question to more of how they decided to invest in what they have so far.
4) What is your decision making process?
This is another one of those questions where the specific answer isn’t that important, but often a time waster, is caught off guard by this question. When you ask this question to an experienced investor, you will get some intel that will help you manage your capital raising pipeline and expectations around closing. Also, if you find that your path forward with an investor migrates away from what they mapped out for you, then you can judge their interest level using that feedback (or lack of feedback). A sub-question on this line of thinking is “who is the decision maker for an investment in our business?” Further, if someone’s title is “Partner” or “Principal” there is a good chance they have to go through multiple approval levels to get your deal done so their enthusiasm isn’t really indicative of getting funding.
5) Can I meet (or speak with) a few founders you have worked with?
You are sorting out two thing with this question: 1) Have they ever invested before and 2) Do their other investments even know who they are? Some investors are in one or two deals as part of an angel network, etc. and they boast about those deals as their own, when the founders don’t even know them. Also, often an angel investor is someone who hasn’t invested much, but they have advised many founders, so you can learn a lot about this investor by speaking to founders they have mentored. Do not overlook this step.
5) How many deals have you invested in within the last 2 years?
I run into investors who invested in the past, or worked for a VC fund in the past, but they haven’t done anything recently. You can overlook this, but if they aren’t familiar with current market terms, structures, dynamics, then they may be difficult to work with as you near closing or worse. They may be dragging out the process and wasting your time with no intent to close and fund. Another good question to ask here is “how many deals do you do per year?”
6) In what ways can you add value to our business?
Not every investor can add a ton of value in every deal. However, experienced investors know rather quickly if they can or can’t add value in a business and are usually rather transparent about that. An investor may not be able to add much more value than just adding capital, but this question is another one that can catch someone off guard so the way they handle the answer can tell you if they are a time waster or not.
7) At what stage do you typically invest?
Similar to the check size question, this is one where a well articulated answer is all you’re looking for. If someone starts saying, “Well you know, I do a little of this and a little of that” then it is a red flag, but not a deal breaker. You should dig in more on their experience. Experienced investors know what their sweet spot is and can articulate it.
8) Ask about their domain knowledge in the space — where did they gain it?
If they mention some expertise in an area applicable to your business, ask about their background and how they obtained their domain knowledge. If they don’t bring this up, then ask them about their knowledge of your space. You don’t have to do be super direct about this, you can tease this out more subtly.
In conclusion, you are trying to get a sense of if this investor is real, or a time waster. You can be tactful about how you ask these questions or seek the answers in a less direct way (which is probably best). Don’t forget, you have a great idea and you are interviewing them for a long term partnership just as much as they are interviewing you. I really like it when founders come to a first call or meeting prepared to ask questions along these lines, but also show they have read all available information on our fund before hand. It drives me nuts when someone asks me what we focus on. I’ve written about it extensively.
Stephen Hays is Managing Partner at Deep Space Ventures, a Micro-VC based in Dallas, TX that focuses on both Esports and B2B enterprise startups.