Key Founder Questions Webinar
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The document provides guidance for founders on questions to ask potential investors during the due diligence process. It recommends conducting "reverse due diligence" on investors to understand how they operate and determine if they are a good strategic partner. Key things for founders to learn include the size of the fund, typical deal terms, investment process details, expectations after investing, milestones for follow-on funding, and past investment outcomes. Founders should also consider whether the investor's approach aligns with their company's needs and if the relationship feels right culturally, avoiding those where negotiations become difficult or the investor acts unprofessionally.
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Key Founder Questions Webinar
- 1. Key Questions Founders Should Ask Investors Adam Quinton Founder and CEO Lucas Point Ventures #FounderQuestions Glenn McCrae Chief Strategy Officer EGFS
- 2. About Us 2
- 3. Getting the VC Meeting • Warm introductions • Tools - Executive Summary - Pitch Deck 11/13/14 Adam Quinton | @adamquinton 3
- 4. Basic Fit – Are They into You? • What is the technology/market focus of the fund? • What stage do they focus on? • Do they invest in your geography? 11/13/14 Adam Quinton | @adamquinton 4
- 5. Agenda 1. • Reverse Due Diligence Background 2. • Key Things You Need to Know 3. • When to Say “No!” 11/13/14 Adam Quinton | @adamquinton 5
- 6. Why Reverse Due Diligence? You Owe It to Yourself • It’s your company, your team, your life! • So put as much thought into due diligence on investors as they do on you • YES – you can and should ask questions 11/13/14 Adam Quinton | @adamquinton 6
- 7. 1. Reverse Due Diligence Background • What You Are Getting Into When You Take Professional Money • Doing Your Research • Your Goals in Assessing Investors 11/13/14 Adam Quinton | @adamquinton 7
- 8. What You are Getting Into When You Take Professional Money “The day you raise money from a venture investor, you’ve also just agreed to their business model” Steve Blank: Fund Raising is a Means not an End 11/13/14 Adam Quinton | @adamquinton 8
- 9. VCs are Demanding but (Mostly) Fair 11/13/14 Adam Quinton | @adamquinton 9
- 10. Doing Your Research • Study websites like crunchbase, angellist, cbinsights and talk to investees • Being Prepared: – Allows you to focus on direct questions that are not in the public domain or on issues that are unclear – Makes you look smart, prepared and professional when you interact with VCs 11/13/14 Adam Quinton | @adamquinton 10
- 11. Your Goals in Assessing Investors 1. Understand how a VC operates, including how they make money 2. Work out whether the way they operate aligns to help or hinder you and your company 3. Confirm if these are people you want to partner with ... for a LONG time 11/13/14 Adam Quinton | @adamquinton 11
- 12. 2. Key Things You Need to Know • Right From The Start – Are We Talking Serious $$$ – Ownership/Deal Philosophy • Once Things Are Moving Along – Investment Process – How Things Work Post Investment • When You Are Closer to the Finish Line – Milestones – Winners and Losers 11/13/14 Adam Quinton | @adamquinton 12
- 13. Are We Talking Serious $$$ • How big is the fund they are investing from? => Are you an option or an investment? • How old is the fund they are investing from? • How many checks do they write a year? • What is their typical check size? • How much dry powder/reserves do they keep per investee? 11/13/14 Adam Quinton | @adamquinton 13
- 14. Ownership/Deal Philosophy • Do they primarily seek to lead rounds? • What is their typical target ownership %? • How many seed rounds have they done and for what % of them: a) Did they lead the subsequent A b) Follow on in the A c) Not participate in the A 11/13/14 Adam Quinton | @adamquinton 14
- 15. Investment Process • What is the typical time from first contact to close? • What are their key due diligence requirements? • Who green lights investments? 11/13/14 Adam Quinton | @adamquinton 15
- 16. How Things Work Post Investment • What do they see as their key value add? • Do they stress that they are “hands on”? • Which Partner will be involved? • What is the fund’s policy on governance/Board Seats? • Do you have a say in which member of the fund gets the Board seat? • What is their expectation re exit timing? 11/13/14 Adam Quinton | @adamquinton 16
- 17. Milestones • What milestones will they track to determine if they would lead our Series A? • What happens if you don’t hit those? • What happens if you are close but need more runway? • How many times have they participated in a Bridge Round? 11/13/14 Adam Quinton | @adamquinton 17
- 18. Winners and Losers • What have their returns been? • Ask them to name their main successes and failures • How many exits in your space in the past three years and to whom? • How did they handle companies that struggled? • Ask for 3 CEOs of investee companies to talk to 11/13/14 Adam Quinton | @adamquinton 18
- 19. 3. When to Say No 11/13/14 Adam Quinton | @adamquinton 19
- 20. When to Say No • The investor is a jerk (not the same as tough) • Negotiations get dirty • They fail the gut test 11/13/14 Adam Quinton | @adamquinton 20
- 21. Wrap Up 1. Reverse Due Diligence Background - You know why it matters and it’s OK to ask 2. What You Need to Know - Difference questions at different stages 3. When to say “No” - It just doesn’t feel right 11/13/14 Adam Quinton | @adamquinton 21
- 22. Final Caveat 11/13/14 Adam Quinton | @adamquinton 22
- 23. Thank You and Questions? @adamquinton adam@lucaspointventures.com www.lucaspointventures.com www.analysttoangel.com contact@earlygrowthfinancialservices.com www.earlygrowthfinancialservices.com @earlygrowthfs 415-234-3437 11/13/14 Adam Quinton | @adamquinton 23
Notas do Editor
- This applies at any stage
- Focus: Are you in scope of what they do or peripheral/not relevant at all Stage: Seed, A, Expansion stage? What mix? Geography: If you are outside their region They are less likely to invest b) prefer to follow not lead c) won’t have much value to add anyway (which is why they won’t lead) Similar investments: Be wary if they do … don’t say anything that would be compromising if they pass the info on to another investee Go in aiming to get to YES/NO more quickly because there is a risk they will say … “we won’t invest because we have a competitive situation”
- This applies at any stage
- Multiple differences from Angels: Crucially VCs work with someone else’s money, Angel’s with their won money Angels can have may motivations in addition to making money VCs have a single fiduciary responsibility – to make money for their LPs Hence Per Noam Wasserman over 50% of Founder/CEOs have gone after 4 years – VCs look for mgmt that can scale and with a 5 person VC Board in most all cases the founders have lost control regardless of their equity stake VC structures drive behaviors 10 year life reduces time pressure initially, creates it at the end VCs look for bigger wins, Angels could be happy with lower value exits VCs have a bias to get you to take lots of money and grow much faster
- Remember – it’s their JOB
- Google: Ask a question when the info is on the website loud and clear … and you just look DUMB
- The reality is you might only have one lead investor willing to write a term sheet: Hence most basic part of the big picture … a) Do I want to work with these people b) if these are the only people I can get money from, what do I need to do going forward to protect myself from potential downside
- FUND SIZE IS A KEY POINT: Option vs investment math: For a $1bn fund $250K is play money, even $5mn is an option. For a $100mn fund $250K is play money, $1mn starts to be an investment For a $25mn fund $250K is small investment $1mn is a big bet If that VC who is viewing you as an option now makes up most of your cap table you're completely screwed if they don't lead your next investment. This will be even worse for founders as then literally all your eggs are in that basket - at least if you have a true party round where you have a bunch of angels, maybe a few smaller seed funds and then one or two big guys taking an option you are less reliant on them if you have a choice - take money from the long term person versus being an option - even if the fund is less of a name. How old is the fund: So what stage in its life cycle Is this an active fund in its first three year investing mode Or A zombie fund in intel gathering mode Number of Checks: Another angle on the age question – are they in active investing mode Check size: Do they fit your round Dry powder/reserves: Do they have the capacity to follow on and support future raises esp your A
- Lead: Finding a lead is crucial and can be the hardest part of the process You need someone who will commit early
- Time line: Time line is crucial for your sanity! Thoughtful but speedy is best Due diligence: Heavy or lite Green light: ie who are the key decisions makers you need to get on side – and where does your champion fit in?
- Value add: Sales/marketing advice, hiring, strategic insights etc Hand’s on: Maybe too much!? Depends on the founder's experience an appetite for a co-pilot Partner: The dynamic sof your relationship can come down to the individual partner. A well-respected fund can have partners that are toxic and a lesser-known fund can have great partners. As a result you need to understand BOTH the individual you will be dealing with and how that individual interrelates with the greater fund to know what you’re getting into. Governance: Do they require a Board or Observer seat? Who takes the seat – a Partner or maybe they use put a junior in an Observer seat to literally observe and report back, ie add little value Exit timing: From your investors, you want calm, unemotional analysis of ROI with a healthy urgency that also considers sometimes patience will bring better returns. Investors who have a fund structure that creates a pressured, stressed out need to see returns quickly can lead to emotional decision-making that ends in the unnecessary and early demise of companies that need more ramp time. (eg you come in right at the end of their investment period; they have had poor performance and need some quick wins)
- Milestones: What are their expectations of you? As Guy Kawasaki noted … VCs are not your friends … unless you make your numbers. Beware separate mutli stage funds under a single VC umbrella: Important to know whether, If you reach those milestones, the investor will personally lead the series A or are those investments out of a different fund which will be lead by another partner? BECAUSE Then you might potentially need to win over another partner within the fund and you're subject to their inner dynamics If that is the case meet that partner and get a sense of if you like him/her Also make sure that you have access to that partner for update meetings
- Exits: And for those exits … did they make the intros or were they incoming approaches? Returns: These are reported to LPs quarterly. They should be able to cite them off the top of their heads. (This is the main metric by which THEY are judges by THEIR investors.) Are they doing well or looking to swing for the fences because they need a big winner!? CEO research: Focus on the hardship cases … winners win anyway. Don’t be afraid to go off list and talk to CEOs they don't recommend, especially ones who went through something tough with the fund. The best investors will stand behind the tough situations they’ve been in. They will be okay with you talking to the founders who might have wound up being ousted, for example.
- Negotiations get dirty: if you feel are totally outmatched during the negotiations and they are trying to be too cute/too aggressive etc, you might want to turn them down e.g. personal experience of one founder - It was a very successful guy who makes a few angel investments. - He makes a few bets but likes to make large ones and he wanted to take our entire round - I was on the phone with him discussing the deal and it became very clear i was out of my league. - He was also asking for not normal terms saying he wanted them to be "easier and more clear than normal VC deals". - What he was saying just didn't make sense. - In that case it is less about questions and more about trusting your gut that you don't want to do business with a person like that. I would have been eaten alive and would probably own very little at the end. Your attorney is a key resource around normal market practice re terms etc. Trust your gut: e.g. personal experience of one founder - Based on my own experience I’d rather take an investor who is tough at the outset (harder negotiator on terms, for example) but who is known to support the company and treat the company fairly post investment than take a great valuation from a firm that will add a toxic board member to your governance team and scuttle your chances for success down the road.
- Other resources: Brad Feld – Venture Deals