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When founders are actively fundraising, investors are usually the ones asking dozens—if not hundreds—of questions. But it’s not just founders who are selling themselves; venture capitalists, too, need to make a case for why an entrepreneur should trust them or give them a cut of their business.
To ensure their relationship with investors is a partnership, it’s important that founders pose the right questions—and not just while negotiating the term sheet. Here are some of the things VCs think founders should be asking while courting investors.
What do you think of my pitch?
“It’s rare that founders actually ask this simple question in a pitch meeting: ‘So what do you think of my idea?’” says JJ Kasper, a partner at Blue Collective. “I get why it doesn’t get asked all that often. It can be a bit awkward to ask this as a founder and a bit awkward to answer as an investor—sort of like going on a first date and, as you drop the person off at his or her door, asking, ‘How would you rate your levels of affection and attraction to me now?’”
But Kasper believes that discomfort is why the question can be valuable, even if it puts investors in a position where they’re offering a snap judgment. “It shows a directness and practicality on the part of the founder that is the key to sales, hiring, and any other human interaction,” he says. “And it forces me, as an investor, to give you a point of view—sometimes a quick ‘no,’ and sometimes encouraging excitement.”
How does this work?
Even scheduling investor meetings can be time consuming, let alone securing funding. One thing founders should get clarity on early into a potential partnership is how the investment process works. When does a fund decide whether or not to invest in your company? When do they issue a term sheet?
“We’re not like Shark Tank where, at the end of the meeting, we’re deciding to invest in a company or not,” says Alex Nwaka, a senior associate at Touchdown Ventures. “It’s a decision made over time, and there’s a process in which we get to that decision. Nwaka says it is “critical” that founders get enough information on the process—how long it will take, what each phase will entail—in the first meeting.
Who are your references?
Jocelyn Kinsey, a principal at DFJ Growth, says entrepreneurs should ask certain tactical questions, such as, “Where are you in the life cycle of your fund?” That kind of information helps give a sense of how soon the fund may expect a return on its investment. But one of the key things to request is references, so you can hear from portfolio companies that have worked with the investors—for better or for worse.
“It’s a two-sided relationship between VC and founder,” Kinsey continues. “You need to do due diligence and ask for portfolio company references from founders that have been successful, and from others that have been through tough times.”
How do you deal with a failing startup?
People on both sides of the table tend to focus on the success stories, so it can be especially useful to hear from the companies that have sputtered out. Cheryl Cheng, a general partner at BlueRun Ventures, believes that bringing up “the f word” is critical. “Founders are inherently optimistic people, but it is important for founders to know how investors deal with companies that are failing or have failed,” Cheng says.
In truth, about 70% of startups reportedly fail. “I wish founders would ask about how VCs have dealt with those situations,” Cheng says. “It’s common to talk about the successes in a portfolio and try to re-create that success. However, the dark and hard times are really telling.”
Can you play devil’s advocate?
The people intimately involved with a business are usually the ones who know most about it. While investors can be a good sounding board, founders should also request the right kind of feedback. “Too often, founders ask affirmative, validating questions that tend to ‘lead the witness,’ such as, ‘Am I doing this right?’ or ‘Aren’t we doing great?’” says Nan Li, a managing director at Obvious Ventures.
Li thinks entrepreneurs can set themselves up for more objective answers by asking questions like, “Can you be a devils’ advocate?” or “Can you connect me with someone that might give me a different point of view?”
“Investors are good at offering perspective, but questions from founders that aren’t biased will lead to answers that aren’t confirmatory statements,” Li says.