Before saying “I do,” a Venture Capitalist and a founder should ask themselves ten things.

A startup-VC relationship at the (pre)seed stage is similar to a shotgun wedding: be sure it’s a good fit before jumping the broom!

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The inside joke in the venture capital (VC) community is that settling on an investment is akin to selecting a suitor. However, while considering pre-seed and seed stage investments, here are a few critical questions that a Venture Capitalist and entrepreneurs should ask before engaging in a long collaboration.

1. Am I partial?

VC: Bias in venture capital is a genuine issue. Bias may affect investment decisions in various ways, ranging from human bias to model bias (in the case of machine learning algorithms). Confirmation bias is a common example of human prejudice, in which a VC exclusively pursues information that confirms her opinions. So, before completing a term sheet, it’s a sensible move to self-reflect and check that no undue prejudice is at work.

Founder: When a VC in your area expresses interest in your business, it may be enticing to reach an agreement early on. However, this might be due to location bias, in which the entrepreneur believes that a local VC would be more knowledgeable — and hence a better fit for the firm. In actuality, there may be VCs outside your immediate area who are more aligned with your objective and philosophy.

2. What is my level of desperation?

VC: Most venture capital firms generate a net profit from one or two percent of their portfolio businesses, which more than compensates for the loss of most of their other unsuccessful projects. Assume a venture capital company has lost money on most of its recent efforts. In that scenario, it can be tempting to put enormous sums of money into a high-risk, high-reward business in the hopes of turning it into a disruptive unicorn with a 100x return. But it’s important to remember that hasty judgments nearly always come with a price. No matter how anxious you are to tie the knot, you must conduct thorough research.

Founder: It can be pretty enticing to accept the bait when any VC expresses interest in your firm, particularly if you have been trying to raise money for a long time with no results. Desperation might cause you to ignore critical variables such as transaction conditions (for example, percent ownership) and resource distribution, like the forms of help the VC can provide the firm other than finance.

3. Status or substance?

VC: Some startups are hot, according to venture capitalists. They may have a significant social media following or have had a piece about them released on a prominent site. Maybe they have a celebrity endorsement or two on their side. Unfortunately, popularity does not always imply a good business plan. In a marketplace where smoke and mirrors are frequently employed, what “appears” to be intriguing may not be. On the flip side, there are some fantastic business strategies that have been encapsulated in a somewhat flat pitch deck.

Bottom line: Don’t ever get sidetracked by the startup’s “status,” and instead focus on the content.

Founder: Parallel to the notion of well-known startups, specific VCs may be famous but not the best match for your particular business. While a renowned company’s support does influence future valuation negotiations, a VC investment is ultimately a long-term relationship. You want to work with someone who has the knowledge and resources to help your company flourish. Trademarks and fame can only go so far. A firm’s credibility among other founders is a more robust sign of an appropriate VC partner.

4. How much of my interest is driven by competitors?

VC: VCs are naturally competitive and are sometimes subjected to needless competition. We’ve all encountered someone who only wants something when others desire it. When a venture capital firm hears that a competitor is interested in company X, it may rapidly express interest in that business to overtake the rival to the settlement agreement. The psychology at work here is typically reduced to ego and greed.

The difficulty is that these two powerful emotions might obscure a company’s capacity to think simply and clearly as to whether the venture is actually a viable idea in the first place.

This is something that child siblings do with toys. This is something that teenagers do when dating. Make sure that this is not happening with your assets.

5. Is it too soon for me to make a decision?

VC: Don’t settle is a slogan frequently heard on relationship forums. The concept is that when it comes to an essential commitment like marriage, one should not settle (or, in this case, an investment.) The risks are high, and the danger of a tailspin is too great. As a result, before investing in a company, a venture capitalist must first analyze the overall industry environment. Who are the company’s rivals? Are there firms that are more qualified and have already dominated this market? What distinguishes this company? This is crucial in the seed and pre-seed stages because the entire company model might be jeopardized if there is already significant competition that is farther advanced in success in a crowded marketplace.

Founder: Before agreeing to partnerships, it’s highly advisable to talk to numerous VCs and negotiate different term sheets. When you settle too quickly, you don’t give yourself the time and chance to consider all possibilities, some of which may work better to your advantage. Fundraising is a demanding and time-consuming procedure, but accepting any VC investment will cost you in the long term. Waiting for the perfect partnership with the proper terms is preferable to taking the first deposit that gets to the bank.

6. Is there a clear trend of inconsistency?

VC: Startup inconsistencies are a huge red flag. Inconsistent conduct can be shown in situations such as:

1. The information in the deck does not correspond to the data room.
2. The revenue “projections” appear to be significantly overstated (based on prior results) with no explanation.
3. Traction and retention tend to communicate radically different messages about the company’s performance.

Founder: Inconsistent practices from VCs could look like this:

1. The VC touts many resources accessible to its portfolio companies, yet none of the portfolio founders appear pleased or satisfied.
2. The VC appears to be interested in the company but never follows through on the due diligence process (for several weeks or even months).

Inconsistency, at best, indicates confusion and, at worst, manipulation, neither of which is desirable as an investor or entrepreneur. So, if you point out a contradiction and the answer seems odd, leave.

7. Are there dealbreakers?

VC & Founder: Most VCs base their investment choices on an investment thesis. Some theses are sector-specific, while others are founded on other frameworks such as their vision and purpose. Choosing to make investments outside of your thesis as a VC might be a dealbreaker. Similarly, receiving investment from a VC with little expertise in your sector and no motivation to learn about it might also be a dealbreaker.

For instance, if you work for a VC with a thesis focusing on edtech companies, investing in a pharma firm may be a terrible option if your fund does not have the resources and experience to effectively support the startup post-investment. Being conscious of your personal dealbreakers will save you time and hassles in the future for both VCs and founders.

8. Is it possible that I’m moving too quickly?

VC: Timing is critical in the realm of venture capital. You want to be the first to know about an offer so you can take advantage of the most fantastic perks. Jumping to the term sheet, on the other hand, is never a smart idea. This is why VC companies need to speak with a business numerous times before deciding — ideally with different team members. In addition, elements of a company’s proposal or business plan may warrant more investigation.

Founder: Money isn’t always good money. Because they are predatory, some VCs act quickly. The eagerness of a founder to move quickly might come across as desperate, and it can also make you appear weak as an entrepreneur. Spend the time to weigh all of your alternatives if you know how much your firm is worth.

9. Do we have a common goal?

VC & Founder: “Love is not looking at each other but looking together in the same direction.” Both the VC and the founder must share the same understanding of what success entails.

10. Who do they surround themselves with?

The classic statement “you are who you surround yourself with” is quite accurate in both life and business.

VC: Just as you’d want to know about your significant other’s associations, it’s critical to know about the startup’s founding team, particularly in the pre-seed and seed stages. If a startup’s success is intrinsically dependent on technology, yet the founding team consists entirely of non-technical people, you should investigate what this indicates for the company’s future success.

Founder: Venture capitalists frequently partner with other venture capitalists. Likewise, the venture capital community is both huge and tiny, which means everyone knows everyone. Recognizing the breadth of a VC company’s network can aid in determining which contacts can be used outside of that company.

Thank you for your time! Feel free to contact me at ayaspencer.com if you want to learn more about venture capital.