Observations from the pitch meeting: what questions should entrepreneurs avoid? What questions should they ask? When and how should they vet their investors.
A lot of my day is meeting with early stage companies, usually at the seed or pre-seed stages. The meetings are often fairly standard — we introduce ourselves, and spend most of our time reviewing a presentation from the entrepreneur, interjecting with occasional questions. We usually leave ~10 minutes at the end for them to ask us questions, which is plenty of time for them to get the basic questions out of the way.
I am writing this blog post because I have found that entrepreneurs sometimes don’t know what questions to ask their potential investors, and more importantly, when to ask. This lack of awareness can lead to disastrous outcomes, and it is good to understand why. On the flip side, I have had entrepreneurs handle this process extremely well, which dramatically increased their chances of getting funded.
What to avoid:
The most problematic self-inflicted wound, in my opinion, is when the entrepreneur decides that the first meeting should have a heavy “vetting the VC” component — that they will spend 50% (or more) of the meeting time quizzing us about how we add value, how we work with portfolio companies, etc. I believe that some of this behavior is posturing: they want to signal that they are in great demand, and that we should be trying to sell them.
The reason that I find this so off-putting is that it betrays a basic misunderstanding of our relative levels of commitment. The investor is only going to invest in ~5% of the companies that they see, and will rarely revisit a “no” decision. The entrepreneur will hopefully receive a small handful of termsheets — their goal is to bring as many (qualified) firms down the funnel as possible. Once they have multiple firms that have moved down the investment decision funnel, the dynamic will (and should) change.
So, when the entrepreneur spends more than half the meeting interviewing us, it makes me feel that either (a) they are not very mature (and are attempting to create some sort of psychological leverage); or (b) they have misunderstood how to manage their own ‘investor funnel’. Neither is good. To be fair, this doesn’t happen very often (maybe less than 5% of the time).
Investor qualification in the first meeting:
My view is that in the first meeting, the entrepreneur should strive to use their time to make a compelling case for us to invest. They should be asking qualifying and process-oriented questions: ie.,
- How does your investment decision-making process work?
- What is your average check size (or, even better… “based on your Pitchbook profile, it looks like your average check size is normally $1M, and that you mostly invest at the seed round — is that right?)
- Do you have any requirements around ownership, board seats, etc?
At this stage, some entrepreneurs ask a very direct question: “can I ask you for some snap feedback? Based on what you’ve seen in this meeting, what are your initial thoughts?” I think that this is a very fair request, and I always try to answer directly.
Moving towards the investment decision: how to vet more deeply:
After some progress has been made towards an investment decision, the entrepreneur should absolutely turn the conversation around to focus on interviewing the investor.
At the minimum, they should be asking the following questions:
- Talk to me about how you generally add value, and talk me through some specific examples of helping a portfolio company
- How do you think your portfolio companies would compare you against their other investors? Where do you spike relative to others?
- Tell me about times when the relationship with the entrepreneur has become strained? What happened, and how did you work through it? What was the result?
- What are your expectations for your entrepreneurs? Do you have a playbook on how you work with your companies? What does the “top 20%” look like? What about the “bottom 20%” (in terms of working relationship/ process)?
At the bare minimum, entrepreneurs should ask to reference their investors (through discussions with CEOs at portfolio companies), and they should pick the companies themselves, if possible (ie., the entrepreneur should review the portfolio and ask for references from companies that they see as relevant to their own stage, industry, etc). Entrepreneurs should also ask for at least 1 reference of a company that has not gone well — it is good to see how the VC worked with the entrepreneur through tough times. All VCs have some relationships that are better managed than others — if it seems difficult to get the portfolio company reference that you want, it’s not a great sign.
One genius idea: the work session
As a final note, one entrepreneur recently requested a work-exercise with me as part of his interview of me. In this case, we had already had several meetings, and had concluded due diligence on the company. We were moving towards an investment decision.
This entrepreneur was fortunate enough to have plenty of interest in his round, and scheduled a session to assess our fit with his company. He asked the standard questions about how we add value, and we gave a lot of examples of how we might work with a company like his.
Then, he suggested that he send us a package of data about issues he is currently confronting, and then we could analyze it together. This way, he could get a sense for the way that we think about issues that are important to him, and we would get a much better understanding of his business and his own way of working through problems.
My partners and I felt that the exercise was a great success. We did indeed learn a lot about how his business works (which reinforced our conviction that the investment is a good one); the entrepreneur was also a joy to work with… we had a good back-and-forth conversation, and a lively dive into his data. It gave us a chance to shine (because we have a lot of relevant domain knowledge, and understand his business sector well).
In the ~1000 start-up meetings I have had, this is the ONE time that an entrepreneur set up such a work-exercise. It took some effort on his part, and it had the possibility of offending a potential investor (he didn’t know us that well… it’s possible that an investor would be offended by being asked to audition live). However, we thought that it was a genius idea, and something that more entrepreneurs should consider, especially if they are in the luxurious position of choosing among multiple investors.
Any differences of opinion? Other thoughts? Feel free to comment below or contact me directly at eric.rosenblum@tsingyuan.ventures
