What is the best question founders can ask a VC before bringing them onto their cap table? Easy: “Tell me about how you helped a startup through difficult times, even through a shut down. Could you intro me to that founder so I can get their thoughts?”
If a team is going out to raise capital, the quality of the investors they decide to bring into the company is imperative. Many teams just want to raise capital as quickly as possible and don’t do the diligence required to learn more about these VCs. Odds are that things won’t go swimmingly well and straight up to the right, so founders better know what comes in each VC package when making a purchase.
And it works both ways. Seasoned investors know just how hard it is for a startup to succeed, and the best ones focus on the character of the founding team in their initial due diligence. If individual founders haven’t shown themselves able to tackle the hard stuff head on and survive and thrive through tough moments in their lives (we all have them), then chances are they won’t be able to navigate through the very difficult moments of running a company. Here is one of many questions we often ask potential founders before we invest:
“Tell me about a time in your life that you had to deal with personal strife and hardship? How did you get through it and how do you view that season today?”
The startup journey better be a collective one to increase a team’s chance of success. The process of growing a company involves BOTH the team and investors, and each group needs to row hard together. Most VCs promise unending help and connections as to why they are not just dumb money investors. They confidently state during initial meetings they will be with you through the good and bad times, and will always take your calls in the middle of the night. Well maybe this is true, but you need direct evidence from a VC on these questions:
“What have you done in the past when things truly went south for one of your startups and the mere existence of the company was in peril? Did you spend more of your time, capital and connections in trying to help get the team out of that hole?”
Founders should be diligencing investors who have some grey hair and battle wounds, and can apply this experience and wisdom that (in theory) should save the team hundreds of hours of time and effort. Once these potential investors are gathered, it should then be determined if these VCs are the real deal or have just had a couple lucky investments over the years with little help given to those teams that go sideways.
We have worked with vcs in the past who quite publicly say one thing about themselves and their firms yet privately act completely differently (no surprise here). Rather than complain about these individuals and groups, we just choose not to work with them again in the future. If founders at the helm of fast growing and successful startups ask us for recommended investors for their new growth round, we leave these VCs off the list.
On the flip side, we continue to work with many VCs that we have been in the foxhole with before and will go again in a heartbeat. We have seen how they act under duress, do everything to help fundraise future rounds, and trust their motives and actions are what is best for the company to succeed. We clearly love working with these partners and firms— the ride is so much more enjoyable when everyone around the table is pulling their collective weight.
Listen, startups still can and do fail with with a strong founding team alongside helpful and faithful investors who all work and communicate well together. The saving grace is watching everyone work as hard as they try to find new financing or ways to keep the company alive. In the end, both founders and investors can clearly see who DID the work and those who DID NOT — and those that DID the work know they left everything on the field and can walk away with their heads held high and reputations strengthened.
Recipients of this post are not to construe it as investment, legal, or tax advice, and it is not intended to provide the basis for any evaluation of an investment in any fund. Prospective investors should consult with their own legal, investment, tax, accounting, and other advisors to determine the potential benefits, burdens, and risks associated with making an investment in any fund.
