May 02, 2005

Get to know your VC before taking their funds

VCs ask entrepreneurs a ton of questions - including proof - about their business before cutting a cheque. Jeff Bussgang provides entrepreneurs a list of things that they need to find out about a VC firm before taking money. Obviously, entrepreneurs who are about to miss payroll a couple of months down the line cannot afford this luxury. It pays to follow the rule: raise VC money only when you don't really need the money.
So, if you find yourself pitching a VC firm and wondering how they'll make their decision, there are a few important questions to get answers to while you're fundraising:

1) Who is the partner who would serve as the deal champion? Associates and Principals don't typically have carry, so they can't make investment decisions without a partner's support. Junior partners with small slivers of carry may need senior partners to closely oversee the diligence and decision-making process.

2) How long has that partner been with the VC firm? Are they on an equal footing in terms of carried interest (i.e., ownership) to the other partners? If not, they may not be able to "speak for the firm" when it's time to make tough decisions about follow-on rounds and M&A transactions. If so, they will still need to get to consensus, but it's a very different dynamic when your "deal champion" isn't a subordinate within the VC firm.

3) When is the last time that partner made an investment and what other deals are they working on? If a partner is out of capacity, conventional wisdow nowadays suggests sitting on 8-10 boards at any given time is the max, then they are far less likely to take on a new project than if they have recently sold off or shut down a bunch of their portfolio.

4) Where is the VC fund in their fundraising cycle? If they are at the tail end of a fund, they may be more selective in their investments...or more rash. If their current fund is strong, they may be more willing to roll the dice with the final few investments in terms of risk/reward profile. If their current fund is weak, they may need a few short-term, safer hits to make up for poor historical performance.

Arun Natarajan is the Editor of TSJ Media, which tracks venture capital activity in India and Indian-founded companies worldwide. View sample issues of TSJ Media's Venture Intelligence India newsletters and reports.