Raising money from VC’s creates a long-term relationship, so you may as well get a good understanding of each other and set up the foundation for a strong two-way dialog. The VC needs you as much as you need them, so the discussions should feel balanced where you’re learning about each other on equal footing. So, I suggest these questions to begin the first meeting and one important one at the end before you go. Getting started…
I’ve done my general research on the firm but tell me a bit more about the current fund? They should answer with the fund size (e.g. 200M), when it was raised, total invested to date, the remainder left for follow-on investments. Have they had any exits from the current fund (which companies, you can research later to find out how much they invested and likely returned)? Does the fund has any specific theme or stage focus (seed, Series A…)? Depending on the answers, you can get a sense of how likely they are to do new investments (you) and how the fund is performing so far (are they looking for some swing-for-the-fences (they have already done well on something or are very confident) or need safer bets). If early in the fund life (they usually invest aggressively in years 1-4, then follow-on with good companies years 4-7 and need to return the fund in years 7-10, but are likely going out to raise new funds around year 5-7 depending on how it’s all been going) you get more latitude in both their interest and time to make the company work. So, understanding where you fall in their overall cycle is important.
For the last few investments you (partner) or the firm did, can you tell me about the dynamics? This should include their check size, did they lead or follow someone else, how long did the process take from first meeting to a funding decision? You are looking for a clear process, a timeline of 4-6 weeks (or less).
Can you tell me how the firm makes decisions? This should include some generic dialog about the # of partners, who decides on what, when they have meetings (most on Monday’s) and how many deals they have in progress right now. Make sure you have some sense of the pecking order of the partner you are working with and how many other people you will need to convince. New guys have a harder time doing deals or they likely take longer as they want to satisfy everyone and/or doing safer bets, so tenure, rank and the recent success of the partner matters.
Is there any area where you think you/your firm adds unique or disproportionate value? Most VC’s give you a bullshit answer about a big network, ability to connect you with X or Y and some help with building out your team. If you hear some good specifics, you can be done with this question. If you get vague answers (highly likely), you can press one further with, “If I talked to 2-3 of your CEOs (currently funded companies) what would they say is an area where you have been especially helpful?” Again, you’re looking for some specifics and preferably in areas where you need help to grow your company.
Now do your pitch…keep it shorter than you think it should be (~30 mins), pause for questions along they way…don’t read your slides…focus on customer traction and specifics…make sure they know how much you are raising and where you are in the process… then…time to go for the close…
On a scale of 1-10, 10 being you’re going to give me term sheet Monday with no questions on valuation, based on what we’ve discussed, how would you score this opportunity? You’re likely to get some squirming on this one but wait for an answer. If you sucked, you are likely to get a 5 or 6 (they are being kind and not telling you it’s really a 3). 7-8 is pretty good and you’re not likely to get a 9 or 10, but if so, awesome for you! I usually follow this up with a “what would we need to do/focus on to get you to a 9?” This pins them into quantifying the aspects where you need to improve, at least for their investment criteria. In some cases, they will ask for things that you do not plan to do and be OK with that as VCs vary widely on their criteria which can be affected by many things, some in your control, many not so much.
With the answers to these questions in hand, you should have a very good sense of the likelihood of next steps or an investment. With issues around fund dynamics, you’re not likely to change that (unless you are a 9 or 10). For the areas to improve, keep the investor updated when you make marked progress in these areas, usually around customer traction, shipping product or team additions. Regardless, this dialog has demonstrated that you have an interest in them, that you can ask specific questions and understand how the relationship might blossom.