In search of investments, many companies focus on getting the long-awaited “yes” from a venture fund. However, there are a number of questions that a startup should ask in order to immediately understand whether it makes sense to enter into a long path of negotiations and transition to the Due Diligence procedure, or whether this fund is not suitable for you.
Pay attention to the following 12 questions that should be asked to every institutional venture investor.
1. Does your fund act as a lead investor?
Many funds are ready to invest in promising startups, but at the same time, it is pretty difficult to find someone who will risk investing first. If the fund you are negotiating with is not a lead investor, then it is best to start a parallel search for another lead investor.
2. What is the fund’s investment mandate?
When it comes to attracting investments, it is necessary to understand the investment strategy of a particular investor: what are the criteria for selecting portfolio companies, how much money the fund can invest in a startup, what are the exit conditions, and other details.It is essential to understand the focus of the investment fund, and at what stages of the company’s development it invests. For example, if you are focused on growth, then a fund focusing on early-stage projects will not be able to become a long-term partner for you. Based on this idea, it is necessary to form a relationship with the fund.
This information will help you understand the fund’s investment policy and determine other relationships of the project with the investor.
3. How much money do you plan to invest initially and in the following rounds?
This question is crucial for determining the fund’s long-term plans for the company and for planning further development strategy of the startup itself because funds usually try to secure a substantial stake in the company with their first investment, and this fact should be taken into account in future.
4. What is the investment period?
It is helpful to know when your potential venture investor plans to exit the investment. It will help you form an investment strategy and plan the company’s investment cash flows.
5. What is the fund’s policy regarding financing instruments?
To date, venture funds can use various business financing tools, depending on the jurisdiction and the type of fund. In the classic form, the sale of a business share or a convertible loan is used. It will be helpful to find out what financing tools the fund uses and what the standard transaction structure looks like.
6. Does the fund participate in subsequent investment rounds in the project?
Venture funds that make subsequent investments in the company can become a bridge to success if you have not yet achieved a sharp growth immediately. Therefore, it is crucial to understand whether it is worth counting on an investor in this way. This question will help determine how much the funds believe in their investments and whether they are ready to wait or are interested in exiting in the next round.
7. How often do you hold post-investment meetings on the project?
The answer to this question should demonstrate the fund’s interest in the startup. Regular meetings regarding the company’s success show that the fund not only invests money in the project but also cares about its success. This approach also indicates that the fund is determined to work in the long term, and it plays a decisive role for a young company.
8. What value, in addition to capital, does the fund give to its projects?
Some funds invite you to participate in CEO forums, introduce you to multifunctional teams of specialists and meet all your needs. Others will just write a check and not remember you until things go well.
9. What kind of expertise can a portfolio company of this fund receive?
In the early-stage venture, capital market startups need not only financing but also experts who can accelerate the development of the project, close the “white spots,” and help enter the markets. The choice of an investor largely depends on what other value the fund can give to a startup.
10. What are the future reporting requirements?It is good to determine the nature of communication and reporting from the beginning — some venture funds conduct quarterly audits. Others will ask you to make official presentations every year to demonstrate the results. This issue should be discussed in advance so that the communication process goes as smoothly and comfortably as possible for both sides.
11. What is your policy regarding disseminating information among the companies in your investment portfolio?If there are companies in the fund’s portfolio that are your competitors, it is essential to understand whether this will lead to a direct or indirect information leakage towards competitors. To study this issue, it makes sense not only to ask the fund this question directly but also to study third-party sources to find out about the fund’s reputation.
12. How is the integration process with the fund going?
Each firm has different standards, but the project selection procedure usually has the following form: signing an NDA, an internal investment committee, signing a Term Sheet, Due Diligence procedure, and signing a business share purchase and sale agreement. However, the set of documents specifics and the criteria for evaluating an investment project may differ depending on the country of presence and legislative features of both the project and the fund.
Understanding all these issues will help protect your business from unpleasant situations in the future and find “your” investor.