So, the investor has just dragged you through the due diligence knothole. What about the veracity of the investment team? When a company needs our investors, we want them to be ready. You might say, “For what?” Do your homework on them just as they do homework on you.
Due diligence really is a two-way street. If you only think it’s a one-way street when you talk to a capital provider, I’d like you to examine how you can evaluate the funding source themselves. At the same time your business plan is under a microscope, you should be assessing the prospective funding source’s strengths and weaknesses. Consider the following questions:
- How well does the VC firm know your industry?
- How often does it work with companies that are in a development stage similar to yours?
- What assistance can the investor bring to you in terms of management expertise, industry contacts, or support services?
- What’s the reputation of the VC firm in the investment community?
- If the VC firm is going to serve as the lead investor, then how effective will they be in helping to attract additional co-investors?
- Has the VC firm asked for any special reward or compensation for serving as a lead investor?
- What effect will this have on the willingness of other co-investors to participate?
- Will this VC firm be able to participate in later rounds of financing if the company continues to grow and needs additional capital?
To answer these questions, you speak with the owners and managers of other companies in the investor’s portfolio. Determine their level of support, conflict, communication. Be sure you talk to both successful and unsuccessful portfolio companies.
Remember, this is not a “me against the world” scenario. You deserve to know who you’re getting involved with too.