Fundraising is happening at a torrid pace.
Speed dating and shotgun weddings between founders and VCs are happening everywhere and will lead to many unhappy unions.
Since there are no prenups at startups, here are questions you *must* ask before you sign that term sheet!
🔭 Will you lead?
Lead investors are the most difficult to find and must be prioritized. Don’t waste time having extensive conversations with any investor until you know the answer to this question.
🐘 How big is this check relative to your fund?
You want to be sure the VCs are making an investment, not buying an option to invest more later if you enjoy success.
At the seed stage, if their investment is .00001 of the fund size they’re likely not really committed.
📈 Will you join my board?
Some VCs delegate the seat to a more junior member of the investment team.
You want to be sure a lead investor will take on the reputational risk and fiduciary responsibility of being a board member or at the very least be very involved when you need them to be.
⏩ How many investments have you made this year?
Be cautious with investors in “fund deployment mode.”
If your investor is writing tons of checks per year don’t expect them to dig in terribly deeply on your behalf unless you crush it out of the gate.
🔎 What’s your diligence process?
A zero diligence process can be as bad as an overly thorough one.
You want your prospective investors to understand the business you’re in and the risks your startup faces. You also don’t want to complete endless checklists. Find out early their approach.
📜 How soon can you close? Will you fund from an SPV?
Some investors may create a separate vehicle to invest.
There isn’t anything necessarily wrong with this, but it can delay a closing so be mindful of the structure — and which entity will appear on your cap table.
🧩 What’s your ideal syndicate structure?
Does the VC like to take the whole round, work with a bunch of angels, or co-lead?
Some investors are “sharp-elbowed” meaning they don’t like to share deals with other VCs and this can create problems down the road.
🏦 What’s your follow-on strategy? How much do you reserve?
Follow-ons are complicated. You want investors who follow-on to be supportive in future rounds, but be wary of existing investors who may crowd out prospective new, value-add investors.
It’s a bad idea to raise money without asking hard questions for the same reason getting hitched in Vegas rarely works out. As my favorite source for wedding suits, Syms Clothing, used to say in commercials, “An educated consumer is our best customer!”