Know Your Investor Before Accepting a Dime
Chapter Three Excerpt: Startup Muse available from Amazon
I met Dixon Doll twenty years ago when he was running DCM, the venture capital firm that bears his name. My father was the CEO of one of DCM’s portfolio companies and introduced me to Dixon when I was raising money for LayerOne. Dixon eventually passed on the deal, but before he did he gave me a nugget of advice I’ve been using for twenty years. He told me to conduct the same level of diligence on prospective investors that they were conducting on me. I haven’t always used his advice — for example that one time I took $4M from a famous investor who disappeared for a year.
First and foremost you’ve got to realize that you’re going to be in business with an investor for 5– 10 years of your life — if you’re lucky. You better be damned sure you want to work with them. If things don’t work out between the two of you I can assure you that they’re not the ones who are going to be thrown out on the street. Conducting diligence, respectfully, on an investor gives you credibility. How you conduct yourself and your business is something every investor is incredibly interested in — the more professional and thorough you are the more impressed most investors will become. If you do it right you’ll shift an investor’s mindset into sales mode — he’ll work to convince you that you should accept his money instead of having you convince him why he should invest. Here are a few example questions you should consider asking:
Q. Do you think your fund would be interested in investing in our business based on the information you currently have? If so what are the next steps?
Q. What does your investment process look like? What is the typical timeframe? Who else will be involved in the decision to invest?
Q. What is the typical size of your first check? Do you invest alone or with co-investors? How many first round investments will you make this year?
Q. Tell me about the last company you invested in. Why did you make the investment? How long did the process last? Is there anything you’d do differently if you had it to do over again?
Q. Have you talked to any of our competitors? Are you actively working with any of them? Have they shared diligence material with you?
Q. Assuming you’re interested in moving forward, can I get the contact info for a couple of founders you’ve backed who you’re still working with? How about the contact info for a couple of founders you’ve back who you’re no longer working with?
Q. How do you work with the companies you back? How frequently will we communicate? How often will you want us to have board meetings? Will you attend our board meetings or will someone else?
Keep asking questions until it gets uncomfortable. You’ll know when it is time to wrap things up. Most investors LOVE to talk. You’d be surprised long most venture capitalists will let you go on… Press your advantage as long as you can.