There are approximately 1,000 venture capital firms in the United States, according to the National Venture Capital Association (NVCA). The 2020 median fund size was over $100 million for the first time since 2007 and also contributed to a spike in the average fund size to $300.9 million.
As vеnturе capital firms are investing in firms heavily, you need to align your objective with the venture capital firms. We will start with questions to ask a venture capitalist and end with the philosophy of popular venture capital firms for your information in this post.
Below are good questions to ask and find alignment with a venture capitalist which include:
- Can I speak with some of your existing portfolio company CEOs? - It is important to learn from other CEOs the actual relationships with the Venture Capital and also network with them for more opportunities.
- What are your investment horizons (e.g. 10 years) for the exit plans - To prevent shareholder conflicts, you need to align the long-term goals of the company with its investors. 10 years might be too long for many smaller Venture Capital firms to hold.
- What kind of partnerships or opportunities can you bring? - While funding is good, usually it is the partnership and opportunities that a venture capitalist can bring when getting a Venture Capital to accelerate and scale your company.
- What is your track-record for creating value on behalf of the companies you have invested in? - This is a leading question to understand the risk tolerance of the venture capitalist and how they react when investment failed.
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What makes you uncomfortable about our company? What do you like? - This is a good question to learn what is not aligned and whether there is an opportunity to align it.
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What is your domain expertise and where are your blind spots with respect to our opportunity? - Most misalignment in valuing a company is due to the lack of relevant domain experience for the venture capital leading to a different expected growth. You can understand the differences and might align the value of the company better if you provide evidence to them.
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What can you tell me about your firm's business model and type of investors? Venture capital has to make money (by buying low and selling high) for its investors so it helps to understand their model. While valuing a company is usually based on EBITA or revenue, its business model lets you understand when they might exit.
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What is your investment process in terms of time? Funding from venture capital is not as fast as you expect. From thepathforward.io, no venture capitalist describes their process as slow, and asking "How long did their last investment take from first meeting to cash in the bank?" is useful to understand how long to wait before the injection of the fund.
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Do you lead funding rounds? Every large funding round requires a leading investor to start. Some investors prefer not to lead so finding a lead investor for your financing is your priority and essential for completing a funding round. The lead investor plays the largest role in setting the pricing and terms for the round.
With those questions, we also find 2 very prominent venture capitalists with very different investment approaches for your understanding.
Sequoia Captial
A popular Venture Captial firm Sequoia dismissed some myths in its blog. They
- We’ve always partnered early - including DropBox
- Our approach to seed - active financing and helping on strategy, recruiting, and customer acquisition
- The earlier we get to know each other, the better - start of long term of 10+ years partnership like Square and Lydia
From my experience of hearing several startup stories, including Eventbrite, it is important to meet Venture Captial early and show them your realistic future targets. It is most beneficial when you meet them again in the future, e.g. 1 year later, and showcase your ability to meet your own target which is rare for venture capital to see.
Y Combinator
Another popular seed funding is Y Combinator. Again, reading their blog found that
- Y Combinator provides seed funding for startups. Seed funding is the earliest stage of venture funding. It pays your expenses while you’re getting started.
- We make small investments in return for small stakes in the companies we fund.
- We think founders are most productive when they can spend most of their time building. Our goal is to create an environment where you can focus exclusively on building a product and talking to users.
There is no right or wrong and it depends on the management team of your company. Do not rush to get your funding rounds.
