Diligencing your investor — a checklist for founders

Elicia McDonald
Jul 10 · 6 min read

👉 Diligencing your investor checklist 👈

When investors are considering an investment in your business, they will spend a lot of time getting to know you, your business, your vision and your passion for bringing that vision to life.

At AirTree, we support ambitious founders who are shaping the future. We often spend months and sometimes even years getting to know a founder before we partner with them.

However, the diligence process shouldn’t be one sided.

As a founder, it’s crucial you do due diligence on your investor as well. The average VC investment lasts around the same time as the average marriage. You will be working together through thick and thin.

You may even end up so in sync you accidentally dress the same for a board meeting.

Anastasia (CEO and Founder of Flurosat) and I twinning it earlier this year.

But how should you assess who will be the best partner for you and your business?

Diligencing your investor checklist

I’ve created this Diligencing your investor checklist as a resource you can use during your fundraising process.

Some of these questions should be deal breakers, others may be “nice to have” — it depends on your business needs.

One way to work through the importance of each item on the checklist is to figure out where you want your investor to fall on the hierarchy of funding needs — see below:

Level 1: Money quickly

Check that the VC you’re talking to has made at least one investment in the last six months. If not, they likely don’t have money. VC funds last ~10 years with the majority of investments made in the first few years. If the VC doesn’t raise another fund after their initial investment period, they won’t have money to invest in your startup. They may take a meeting with you to market themselves and show a strong pipeline to future potential investors (VCs have to fundraise too!) but this doesn’t solve your level 1 need to get money into the business quickly.

Also check you fall within the VC’s mandate. Can they make investments in your stage and sector? Do this research by looking at their existing portfolio and if you’re unsure, ask them directly. While it’s good to build relationships early, don’t pitch a growth fund to invest in your pre-seed round — you’ll be wasting your time.

Fundraising is painful and the worst outcome when you need money quickly is a slow no. See the image below showing the possible outcomes from your fundraising efforts with the outcome on the x axis and the speed of the outcome on the y axis.

Do everything you can to avoid a bottom left outcome. Don’t be afraid of a quick no. If a VC can’t see a path to an investment, it’s best they are upfront and save you time so you can focus your efforts on more likely funding sources.

Ideally, you’re in the top right and get a “yes” from your VC quickly so you can get back to growing your business. Ask about the VC’s investment process and what they need in order to make an investment. My colleague Jax has shared more about AirTree’s investment process and timelines here.

If you’re looking for funding options to satisfy your level 1 need, check out the Australian startup funding/investor list AirTree created as a resource for Founders.

Level 2: Money on sensible terms

Historically Australian VC has been known to offer some pretty shitty terms. Things like multiple liquidation preferences, tranched investments, ratchet provisions, super pro-rata rights etc. We want to work hard to change this and make VC a little more human. We’ve made a start by sharing our seed stage term sheet on our website which has standard terms that are in line with what you’d see in the valley. We’ve included notes in plain English to explain each term. Check it out here.

If an investor has sent you a term sheet with drastically different terms to our standard seed stage term sheet, ask why. Funky terms in an early round will impact your ability to raise future rounds of capital as well as potentially materially changing your outcome. Sensible terms matter and a good investor will want to make sure you’re set up well for future rounds.

Level 3: Will the VC “passively” help your business?

There are ways an investor can passively support your business. Consider for example:

  • Will the VC’s brand help you with recruitment or customer acquisition?
  • Do you want to be associated with the rest of their portfolio?
  • Will you be able to learn something from their portfolio companies?

One example of how we passively support our portfolio at AirTree is through functional forums. These are quarterly meet-ups for groups of executives within our portfolio who are facing similar challenges in scaling a function. We’ve launched forums for CTOs, CFOs, People leaders, Data Scientists and Design leaders with more in the works. Our portfolio companies love these opportunities to learn from their peers and help each other to succeed.

Level 4: Will the VC “actively” help your business?

If you find a VC who wants to invest on sensible terms and they can passively and actively support your business, you’re going to feel like this duo.

But how do you know when you’ve found it?

Ask yourself:

  • Does the VC have deep operational knowledge or investing experience working with lots of companies to help you see around corners?

A VC will never know more about your business than you do (at least we hope that’s the case!) but they can offer a different perspective that can be invaluable — particularly if it’s based on years of investing and operating experience.

Also ask yourself:

  • Do they have non-investment team members who can help with operational support?
  • Do they have a big enough fund to support you through multiple funding rounds?
  • Can they help with hiring great talent and raising your next round?

Reference checks

If you’ve been through the Diligencing your investor checklist and you think you’ve found the right investor, make sure you finalise your DD with reference checks.

Test the VC’s examples of passive and active support against the experience of founders they’ve worked with.

If you don’t already have a connection, ask the investor for introductions to their portfolio company founders. (Note: VCs need to be incredibly respectful of their founders’ time so don’t expect to get introductions after the first meeting with a VC, but you should definitely do this before signing a term sheet).


Hopefully you will have the opportunity to get to know your VC before you need capital. However, diligencing your VC (before you sign terms) is key to ensuring you’re fully informed about what to expect from the partnership.

It’s a huge decision to bring someone onto your cap table and you don’t want to realise too late that you got it wrong.

AirTree

An venture capital fund in Aus and NZ. Working for gamechangers. First round. Multiple rounds.

Elicia McDonald

Written by

Investor at AirTree Ventures

AirTree

AirTree

An venture capital fund in Aus and NZ. Working for gamechangers. First round. Multiple rounds.

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