We all know that VCs look for strong founders who are capable of leading their companies to extraordinary success. But what should founders look for when choosing a VC? Assuming you have the luxury of choice, here’s some things I suggest based on several years of working closely with founders and observing what’s worked and what hasn’t. In many cases, your investor(s) can have a significant influence on the path a company takes. I worked as CFO for SentinelOne across three rounds of funding and have therefore been on the operating side dealing with fundraising in addition to being, as I am now, a full-time investor.
Here are five guidelines for founders who are in the process of selecting a VC partner.
1: Don’t just pick a VC firm, pick the individual partner
Consider the firm, but more importantly, consider the partner who is leading the investment. When did they join the firm? What are their personal incentives? What is their expertise? You may have a younger partner who needs to make their name at the firm. This can sometimes be an advantage because maybe they’re managing a smaller portfolio and will have more time to dedicate to your startup. That investor is more likely to champion you because they have a greater stake in your success compared to a more seasoned partner with many successful investments already under their belt.
Also, try to gauge the level of commitment and influence that the partner has to their venture firm. The last thing you want is a partner that joins your board and leads the investment, or departs the firm a year later for another firm (which can leave your company “orphaned”), depending on the firm and the stage of your business. Remember, the board seat is owned by the firm, not the individual. And if that individual leaves, you may no longer be at the same level of priority within that firm. For the same reason, make sure you have at least one other partner in your corner to guarantee that your company gets long-term support. Don’t be afraid to ask your prospective VC this question up front: Who will be our partner/champion if you leave?
2: Be operationally aligned
You want investors whose skills and experience are aligned with your startup and the goals you’re trying to accomplish from the current stage-of-company onwards. Look for a partner with expertise in your domain and, ideally, expertise in your specific stage.
For instance, if you’re trying to expand strategically and more investment is not a pressing need, you should look for a partner who has a track record of helping companies build strategic partnerships and scale. On the flip side, you may be a younger company that needs an investor who is skilled in helping companies get off the ground, building the initial wiring, helping with early recruiting and strategizing for future fundraising rounds.
3: Get references from other founders
Look for investors who come with references from founders with whom they’ve worked in the past. Ask for examples that show in detail how that investor benefitted the startup. You’ll want to connect with at least one or two founders who can go deep in explaining how, specifically, the investor added value. This can include strategic guidance, operational advice, recruiting, helping with future financing rounds, and introductions to business partners.
Additionally, founders should ask all potential VC investors for a reference from a company that the investors chose not to fund. How they said no and how they treated the founders throughout the process will say a lot about who the VCs are as people and about the respect—or lack of it—that they have for those in the daily grind of building companies.
4: Make sure you have the same expectations around outcomes
There are some founders who want to get massively rich and will settle for nothing short of a grand slam. There are other founders—usually first timers—who may not admit it, but could be happy with a single or double if the market conditions or original assumptions change; and other founders who know that a smaller exit will put a notch in their belt, provide some financial security and set them up for a home run with their next company.
These are both valid and different objectives, and they require investors who are in alignment with founders, ideally from the get-go. Because there will always be forks in the road and, when you reach a fork, you don’t want a VC who insists on turning right when you want to turn left. For instance, you get a $200 million buyout offer which makes everyone money just a few years into your startup journey. Is this an acceptable exit? There is no right or wrong answer. But you need a VC who shares your expectations from the start.
5: Watch how the VC does technical diligence, and whether they respect YOUR time
If an investor is outsourcing their technical due diligence, that can be a red flag. While not every investor will know your space inside out, they should still ask intelligent questions that get to the heart of what you’re trying to achieve.
Many investors may ask founders to run through a technical-diligence check with a third-party technical “expert” like, say, someone in academia or a technical person in their current or past portfolio. In my experience, that third party is often biased against a technology they did not personally invent. Then they tend to see the risk and rarely the upside.
Each situation may be different and if there is a very specific innovation you are pitching on which the whole business depends on, of course, that may be diligenced. It may be good to push back a bit and understand what the investor is aiming to verify or confirm with the diligence. I’ve seen situations where I’ve supported founders and new investors don’t even attend their own technical diligence calls – a clear signal about how they valued the founders’ time. In fact, as a rule of thumb, I would say don’t take a diligence call unless the investor is also ready to spend the time on that very call. Overall, I believe investors themselves should have a body of knowledge to understand whether or not a startup is onto something truly innovative.
When investors and founders are truly aligned, it can be a beautiful thing and the odds of a successful outcome are greatly amplified, as the founders don’t have additional distractions. True alignment frees up time for a founder to focus on managing the business and ALSO helps accelerate the business vs managing investors—and that can make all the difference.