Questions to ask in a Venture Capital pitch

Over the past 10 or so years, I’ve been directly involved in raising about $85m from venture investors across 4 different companies and 6 rounds of investment, not including public company or seed-stage stuff (that’s probably another $25m or so). I’ve also invested in 4 different start-ups in the past 2-3 years.

Pitching investors is part art and part science, in my opinion, and very relationship oriented.  After probably 300 different investor meetings over the past decade, I still find it challenging to switch from pitch/sell mode to asking questions of the VCs themselves.  Nonetheless, it’s never been more important to understand their business, the fund, and the attitude of the firm that you are going to partner with on your start-up.

With that in mind, here’s a half-dozen questions that I’d ask at the end of a pitch to any VC that you are interested in working with…along with a brief explanation as to why these questions are important:

How big is the fund that you’re currently investing out of?

This is simply calibrating how much “dry powder” the firm has on hand.  Big, new funds have different dynamics than small or older funds.  This is especially relevant after the NEXT question:

How much have you invested out of that fund so far? How many deals is that?

This will tell you what’s really left in the fund. There are issues with both “brand new” funds (such as the need to potentially made a new capital call) as well as with funds that are so old that they basically must be kept in reserve for companies the firm has previously invested in.   “How many deals” gives you a sense of how much capital they typically put to work per deal…which is a fine question to ask directly. This also gives you a sense of the firm’s over-all volume.  A very low volume means that your company really needs to line up with the firm’s core domain/interest or there is likely no deal to be had.

How many deals have you done this year so far? How many in 2008?

This is related to the previous question but starts to consider the firm’s behavior in the current environment…and this is where it starts to get interesting. I believe there is some significant inertia to overcome in getting financing deals done these days. If they’ve not done ANY deals so far in 2009, then one has to wonder what will it take to get them to do a deal?  It’s totally fair to ask them this question directly as well.

Have you made any capital calls to your limiteds yet this year?

And here’s where the smart/confident firms will realize that you’re asking the right question. This begins to show you understand the current macro-economic impact on the VC business and that you’re savvy enough to make sure you’re working with folks that have the support of their limiteds. This is also where they might start to get defensive if they don’t have as much support as they’d like.

If you have made capital calls, have any of your limiteds missed a capital call in the current fund?

This is really one of the most meaty questions you can ask. Try to get a clear “yes” or “no” sort of answer. To say “yes” is to admit that their fund (and maybe firm) is at some risk that this trend continues…and that will inject some (potentially large) amount of inertia into doing ANY new deals; to say “no” is to suggest the firm is in a better position than many of their peers.  Its also interesting to understand if they’d need to make a capital call in order to make this investment.

How long do you think it would take to close this round if we started today?  And would you anticipate any unique “conditions to closing” for this deal?

Closing typical rounds of financing takes time; and, in general, the larger the round, the longer it takes. Even in the best of times 60 days would be considered blazingly fast.  Today, honestly, 3-6 months isn’t surprising. There are many standard conditions to closing a round of financing, such as due diligence.  However, this question is trying to get at whether or not there are conditions that might make the financing more difficult than usual. For example, does the VC require another venture firm to participate in the round?  Does the VC require some significant new customer traction before being ready to fund?  Does the VC require the round to be of a particular size?

I’ll add more questions as I can think of them…but get answers to these and you’ll understand more than most.

UPDATE #1:  What other firms / individuals do you like investing with?

Perhaps the first thing to state is that a syndicate (the set of venture investors in a single round of investment) adds complexity to any round of financing AND the go-forward board and outcome dynamics for any company. This is true, in part, due to human nature and, in part, due to firm-specific behaviors of the partners themselves. Ff your company can avoid a the need/desire to syndicate and raise money from a single venture firm, it will reward you with significant elegance (financing terms, board structure, differences of opinion, etc.) in many cases.  Any sort of negative complexity will tend to arise when things are not going well within a company; the squeaky wheel gets the grease. When things are going well, its amazing how aligned everyone’s perspective and opinions can be.

All that said, finding out what other firms this VC likes to invest with in a syndicate is a great way to do two things: first, you find out who you should go talk to next.  And don’t forget to ask for an introduction to whoever comes up after asking this question.  Second, it is increasingly important to make sure you have a set of investors that get along and have history together. As the Venture industry goes through challenging times, venture firms will be forced to make hard decisions around their portfolio, funds, and strategy. Trying to ensure that you have a set of investors who have a good relationship and have worked together on other deals can de-risk the negative effects of diverging investor/firm agendas.