1/ The same day I saw @itaidamti tweet I was also asked about an investor we know very well- and didn’t have a good experience with. I wanted to convey questions to push the investor on. (HT to @davetisch as well)
2/ It got me inspired to send the email below with context on questions to ask before taking an investment from a VC/PE firm.
3/ Let’s be clear, it is absolutely not realistic to be able to ask all of these questions, and some might even turn off the investor. But I wish I had even known to think of some of these questions- as they would have triggered me to act differently.
4/ When I was asked today about an investor we don’t respect, here were the notes I sent to the entrepreneur- framed as questions they could ask:
5/ Q1: When have you pushed to sell early (whether or not sale was completed)?
6/ Background: a VC/PE firm that pushes the entrepreneur to sell early can cause chaos at that company l. Those are the entrepreneurs you want to talk to – to understand the investor and understand what drove that action.
7/ Q2: What is your average size check from this fund, and how will the check into us compare?
8/ Background: we’re seeing some very large firms invest a small amount into companies as a placeholder. Result? Often orphans at those larger funds (may not get resources/support you need to thrive).
9/ Q3: Can you give me a list of the team members that have left your firm over the past [5] years
10/ Background: some firms have alumni that say amazing things, others not so much. Dig into why and if you see common themes.
11/ Q4: Has your firm ever been asked (formally or informally) to leave a board?
12/ Background: It is often, not always, a big deal to be asked to step down from a board. I’ve asked a board member to step down before- and not because we thought they were good and productive.
13/ Q5: [VC specific] What % of companies do you follow on into? Can you give me a list of companies where you passed on following on in the next round?
14/ Background: you want to know if that firm will be there for you in future financings.
15/ Q6: Can you give me a list of all of the term sheets you submitted over the past year that didn’t close under the (material) terms in the original term sheet. Either because you didn’t win the deal or because the terms changed?
16/ Background: you want to be very cautious of firms that submit great term sheets and then change them.
17/ Q7: Can you give me a list of any CEOs or founders that were replaced after investment?
18/ Background: want to be careful of investors that have a pattern of replacing CEOs/founders when that wasn’t originally agreed to upfront.
19/ Q8: Have you ever had lawsuits with existing or formal portfolio companies, current/former team members at portfolio companies, former team members of your VC/PE firm, or buyers of your portfolio companies? Please provide a full list.
20/ Background: a litigious investment firm tends to not be founder friendly…..and jerks.
21/ Q9: Can you send me a list of every company you have invested into over the past 10 years that isn’t currently on your website?
22/ Background: often investment firms take their “losers” or companies they don’t have positive relationships with off their website. Those are exactly the companies you want to talk to.
23/ Again- not all are realistic to ask. But knowing that these are watchouts for some- not all- firms may help the CEO identify common themes.
24/ Also- if you aren’t comfortable having difficult conversations about some of these topics pre-close, it may not set up for a good marriage post close.
25/ I have no interest in specifically naming the firm that inspired this email chain (and then getting sued). I am interested in trying to help other entrepreneurs find the right partner for them. Hopefully this helps a few CEOs make the right decision.
26/ None of these Qs should be asked the way I wrote. Would come across as arrogant/cynical/off-putting. These are topics for the CEO to think about when considering a relationship. Think through how you would get at these answers in a truth-seeking collaborative relationship.
27/ Sometimes the "why" is as/more important as the "what". i.e. perhaps the firm always passes on follow ons- but ask why. Why they took companies off their website, etc.
But approach the conversations in a collaborative way.
But approach the conversations in a collaborative way.
