What startup founders and entrepreneurs should consider when evaluating a VC firm’s capital investment.
Key Points
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Startup founders are often so intensely focused on raising capital that they overlook the importance of asking probing questions to potential investors.
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When assessing a deal, thoroughly research and evaluate not just the financial terms, but also consider factors like the VC’s expertise, track record, approach to investing, alignment of values, and what else they can offer beyond money.
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Don’t be afraid to ask tough questions; it signals to the VC that you’re serious about the partnership and the company’s success.
The startup financing model on which the tech ecosystem was built is fairly simple: The entrepreneur pitches their company to venture capitalists, then the VC asks a ton of questions about the business before investing a pile of cash. Voila, a wannabe unicorn is born.
Notice that nowhere in that process does the founder reciprocate with their own probing inquiry—like, whether the investor is even the right fit.
And that’s a problem. Afterall, the terms of the investment agreement, the alignment of goals, and the compatibility between your vision and the investor’s expectations can be the difference between supercharging a startup or accelerating it straight into the ground.
Sid Paquette, veteran VC and Head of RBCx, is still baffled by the lack of inquiry: “I think founders think it’s a one-way investigation, and it shouldn’t be. Very rarely—if ever—have I had founders actually vet the venture capitalists.”
“Founders think it’s a one-way investigation, and it shouldn’t be. Very rarely—if ever—have I had founders actually vet the venture capitalists.”
Which is to say that you shouldn’t necessarily settle for the first VC who offers up a term sheet. Instead, focus on finding a good partner that’s committed to supporting your young company’s mission, long-term goals, and growth trajectory.
And that, insists Nicole Kelly, RBCx’s Head of Marketing and Growth, means asking potential investors insightful questions and doing thorough due diligence. “It’s not just about the details of the deal; it’s about asking whether this investor is a good fit for your business, for you, and for your reputation,” she says, adding: “How do they treat founders? What markets are they interested in? Which areas do they have significant background knowledge and expertise? If you’re signing up to give a chunk of your company away and you have to work with an investor for five, seven, 10 years, do your diligence to determine whether they’re someone you want to work with and can offer the empathy that you need from them.”
“It’s not just about the details of the deal; it’s about asking whether this investor is a good fit for your business, for you, and for your reputation.”
To help you get the best backer (and their money), we’ve put together the top 25 questions, as well as the key areas of inquiry, that every entrepreneur should be asking investors.
Download the full list of questions.
But first, should your startup take venture capital money?
Before you agree to take a single cent, it’s worth pausing to consider whether institutional investment is even right for your business. Sure, venture capital can extend your runway to live another day, but it’s important to interrogate how it will support your startup’s specific needs—and, crucially, at what cost. “I think that founders are wholly uncritical both about the partner they are working with, but also whether venture capital is appropriate for them in the first place and what their future financing goals are,” says Jamie Rosenblatt, General Partner of Toronto-based Golden Ventures. “Founders would be wise to ask themselves what is the financing journey I want to go on for the long haul and am I aligned with my investor on that.”
“I think that founders are wholly uncritical both about the partner they are working with but also whether venture capital is appropriate for them in the first place and what their future financing goals are. Founders would be wise to ask themselves what is the financing journey I want to go on for the long haul and am I aligned with my investor on that.”
Michelle McBane, Managing Director of Standup Ventures, similarly agrees that just because someone wants to invest in your business, doesn’t mean you should take external financing at that time. “We always say that you shouldn’t raise until you’re ready to test your next hypothesis, and put that money to work and see if you can get to the next milestone.”
Questions about the VC fund and strategic focus
Assuming you’re confident about taking capital, you’ll want to understand the prospective VC’s areas of focus and funding details. Their investment thesis (essentially, the key industry sectors, markets, and startup stages they focus on) and investment mandate (the valuations and cheque size they invest in) are the guidelines or criteria they use to evaluate potential investment opportunities. By familiarizing yourself with this framework, you can better determine whether there’s alignment with your startup’s vision, market, and objectives, ultimately helping to ensure the partnership is a mutually beneficial one.
Further, delving into the details of the VC fund, including their limited partners (LPs), the allocation between primary and follow-on investments, and their risk appetite, can provide insights into the fund’s stability, investment strategy, and capacity for future funding rounds.
The goal here, explains Rosenblatt, is to get answers to pertinent questions that only the VC can answer. “Most founders spend a lot of time asking rote administrative questions that could be answered by reading our website’s FAQs. I don’t want to waste 20 per cent of this meeting telling you things you could learn through a quick Google search,” he says. “Don’t ask questions just for the sake of asking questions. Actually think through what you’re trying to find out in order to make an informed decision. And if you don’t have any good questions then ask them their impression as to why you are or are not investable.”
Sample questions:
- What’s your vision for our startup?
- Where are you in your VC fund life cycle?
- What is your follow-on strategy?
Questions about the VC’s portfolio and performance
Familiarizing yourself with the VCs existing portfolio of companies (again, this should be researched upfront) can provide insights into their expertise, network, and potential synergies. Additionally, digging into the VC’s track record of success, failure, and lessons learned can shed light on their performance in nurturing startups.
In this area, reaching out to other startup founders within your would-be investor’s portfolio can often be the best source of truth. By speaking with fellow founders, you can gain firsthand perspectives on the VC’s involvement, responsiveness, their level of support, and the potential benefits and challenges of partnering with them.
And while most VCs will happily supply you with a list of CEO contacts to speak with, Paquette recommends not limiting yourself to it: “If you’re looking to take money from a VC, I think every entrepreneur should call every CEO of every company they ever invested in to get feedback on how they behaved when times were really bad,” he says. “Because that part is key: it’s all well and good when the business is growing and everything is going according to plan, but talk to me about a time when you missed your financial targets.”
How to reference check a VC
Although not an exhaustive list, here are some essential questions you should consider asking a startup founder who’s been backed by your prospective investor:
- What is the VC firm like to work with?
- In what areas did you ask for help and what were the results?
- How did the VC act when things went off track? Did you feel they had your back?
- Would you work with this VC again on your next startup? Is there anything you would have done differently?
- What was the due diligence process like?
- If they joined your board, what value did they add?
Questions about the deal and post investment
It goes without saying that aligning on the financial terms is fundamental. If a VC has expressed their willingness to invest—as the lead, ideally—you’ll want to review the proposed term sheet and terms of the investment carefully. Evaluate things like the VC’s expectations regarding board involvement and governance, their preferred level of engagement and reporting, and their commitment beyond the initial investment.
Beyond the numbers, have a transparent discussion about the due diligence process, including what’s involved, how long it will take, and the other decision makers involved. Don’t be afraid to get clarification on any unfamiliar terms or clauses, and ensure that they align with your company’s interests and objectives. If in doubt, consider consulting legal or financial advisors for a thorough review.
Further, you’ll want to ascertain the VC’s commitment beyond the initial investment. Ask about their willingness to provide follow-on funding to support your company’s growth stages, along with their typical investment horizon and exit strategies. It’s crucial to ensure that their investment timeline aligns with your company’s growth trajectory and long-term goals.
Sample questions:
- Are you interested in leading the deal?
- If you typically take board seats, what veto rights would our company have?
- What will you do to help us raise the next round?
Questions about the VC’s value-add
Fact: Financial backing alone won’t make your startup a success. (Just look up once deep-pocketed tech businesses like Jawbone or Theranos if you don’t believe us). VC investors who bring strategic guidance, industry expertise, and operational support can help you navigate the complexities of startup growth. Further, they can open doors and facilitate networking opportunities with potential customers, partners, and even other investors. By simply focusing on the cheque size, you might miss out on some invaluable resources that can accelerate your growth trajectory.
RBCx’s own Director of Marketing, Growth Operations, Betsy Taggart, learned this the hard way. Prior to helming our Platform Advisory Services—an in-house program that offers hands-on support and strategic advice to select clients to help them scale—she sold her stake in a health tech venture she co-founded after raising an initial Series A. “In retrospect, as a first-time founder, I didn’t have enough mentors or advisors I could go to when I had the wobbles or needed to talk things through,” she says. “Experienced VC’s often have excellent advice and very valuable insights right at their fingertips because they’ve been through it before. Next time, I would make sure to surround myself with that type of support. You need to feel confident and supported in order to do your best work.”
Sample questions:
- Aside from capital, what value-add or support can you provide?
- How have you helped other companies that you’ve invested in?
- Do you have a robust network and can you introduce me to some potential customers?
Questions about culture and values fit
The right VC relationship should feel like a shared cultural ethos in which both parties are working towards common goals and can navigate challenges collaboratively. Some VCs centre their values as part of their investment strategy—Golden Ventures, for example, tracks their DE&I efforts within the firm and its portfolio, and Standup Ventures focuses specifically on backing female-founded/led tech companies. Other backers, however, may have to be assessed on more intangible factors like the compatibility of each team’s communication and working style. Either way, cultural fit and values alignment should never be an afterthought.
“I cannot stress enough the importance of being aligned on purpose and values with the people that you’re going into business with,” says Taggart. “Whenever you accept money, trust is very important—like the foundation under the house. Challenges are inevitable, but with a solid foundation I think you will be better poised to build higher and faster.”
“I cannot stress enough the importance of being aligned on purpose and values with the people that you’re going into business with. Whenever you accept money, trust is very important—like the foundation under the house. Challenges are inevitable, but with a solid foundation I think you will be better poised to build higher and faster.”
Sample questions:
- How do you like to work together?
- How do you act when things don’t go according to plan?
- How do you promote DE&I internally and externally?
Does founder-investor fit matter more than money?
Given the many considerations that go into the financing journey, it’s not surprising that the question of whether founder-investor fit or funding matters more is the subject of debate within the startup ecosystem. Here, three of our experts make their case:
“I do believe better fit ultimately enables a greater level of shared success,” says Taggart. “I have trouble de-coupling fit and money because they are so intertwined. However, if someone offered me a bit less, or asked me to give up more than someone who I didn’t have top-of-house alignment with, I would go with great fit any day of the week. I think that when you go in with connection, openness, and a growth mindset, it’ll be a win-win.”
“It depends. I think that when it’s life or death, the only thing that matters is money. But, if you have a choice, then I would say the only thing that matters is fit,” says Paquette. “If you only had one interested investor but you, as a founder, thought they weren’t a great fit for the business, I could never in good conscience suggest that you say no to them because, quite simply, you need that money to survive.”
“Absolutely not, money matters more than anything,” says Rosenblatt. “Nine-nine per cent of the success or failure of a company will fall to the founders and their people. My job is to maximize that one to ten per cent influence I can have. So, of course fit matters, but I ultimately think that success and failure sits with the people working for the company.”
Final thoughts
Remember, selecting the right VC partner isn’t just about securing funding; it’s about forging a mutually beneficial relationship that drives your startup’s growth and success. As you embark on the entrepreneurial journey, it’s essential to recognize the significance of asking questions and conducting thorough due diligence.
“Ask all the hard and awkward questions. Ask whatever you want to know. Especially those things that make you uncomfortable or that might be a source of conflict,” says Taggart. “Really do the work, shop around, and look at each person in the room critically—what do they offer? Do they have proven success? You should be interviewing the VC as much as they’re interviewing you. Don’t feel like you’re the lowly person looking for money. You have the idea—they need ideas, so don’t underestimate how valuable you are.”
