9 Questions to ask Venture Capitalists as a Startup Founder
If you’ve been working on a startup for very long, you’ve likely come across the term “venture capital.”
Venture capital (VC) is a form of capital investment that provides financial backing to early stage startups and small businesses with high growth potential. Venture capital financing is necessary for many startups because it makes it easier to get off the ground without having to rely solely on personal savings or bank loans.
Venture capitalists (VCs) are investors who provide funding in exchange for private equity in the company, allowing them to share in the profits if the business succeeds. They are distinct from other kinds of investors like angel investors. Usually, VCs are hoping to eventually cash in on their investment with an exit strategy that may include an IPO (initial public offering.
Typically, startup founders present their business ideas to VCs using a pitch deck. However, in addition to giving a strong pitch, it’s very important to ask the right questions when meeting with potential venture capitalists who are considering investing in your business. Asking the right questions can help you determine if each VC is a good fit for your company and identify potential areas of conflict in advance.
Here are nine of the best questions for startup founders to ask venture capitalists:
1. “Will You Lead a Finance Round?”
This is one of the most important questions you can ask a potential VC as a startup founder. Having an experienced venture capitalist as the leader of your finance round can lend additional credibility to your company, which can be beneficial for attracting new customers and investors alike. Once you’ve secured a lead investor, other investors will generally have more confidence in your company’s potential success, making it easier to convince them to invest in follow-on rounds.
When you have an experienced venture capitalist leading the finance round, it also helps ensure that all aspects of the fundraising process are handled properly. Less experienced VCs may lack the ability or confidence to lead a startup investment round, so it's important to vet each potential investor to determine if they are experienced enough to make a good choice of lead investor.
The lead investor also typically (though not always) supplies the largest portion of the financial investment, so asking if a potential VC is willing to lead the round can also clue you into how much money they are willing to invest. If a VC you're courting tells you they're interested in investing but not willing to lead the round, keep them on your radar but focus on securing a lead investor first.
2. “What Other Investments Do You Have?”
It's also a good idea for founders to ask potential VC firms what other investments they're currently committed to. The answer to this question can provide valuable insights into the VC’s investing strategy and preferences. This information can help you determine if your business model aligns with the investor’s interests as well as how much of a priority your company will be for the investor.
Asking VCs about their other investments can also help you get an idea of how large of a deal the VC is comfortable moving forward with, and whether or not your company's current needs fits within those parameters. It also gives you an idea of their level of experience in your industry, which is an important factor to consider when deciding whether or not they’re a good match for your company.
3. “Do You Typically Take Board Seats?”
Some venture capitalists will expect a seat on your company's board of directors in exchange for their investment, while others will be happy to take a more hands-off approach. It's important to ask VCs early in the process if they usually take board seats so you understand what kind of relationship they will have with your company.
Whether or not a VC will take a seat on your board dictates how much control and influence the investor may have over your company's operations, as well as how involved they may be in decision-making. Understanding how this dynamic will work up front can help set expectations between your business and the VC from the first meeting and prevent costly misunderstandings down the line.
4. “How Have You Helped Other Companies You've Invested In?”
Asking potential venture capitalists about the ways they've helped other companies they've invested in is yet another important piece of a founder's due diligence. Some VCs don’t play much of a role beyond funding, and others are almost like another member of your management team. This question allows you to get an idea of what kind of value an investor will bring to your startup.
A good VC should be able to provide concrete examples of how their investments have paid off, such as helping the company gain traction, find new customers, or expand into new markets. If a potential investor is not comfortable providing specific examples of the ways they've benefited the startups in which they've invested previously, you can consider it a red flag.
It's also important to ask about any areas in which the VC has fallen short with prior investments. This will give you an insight into not only their strengths but also their weaknesses — which is a critical insight into whether or not they are the right fit for your company.
In addition, asking prospective investors about the other companies they’ve invested in gives you an opportunity to discuss any potential conflicts of interest that may arise due to their involvement with other companies. This is especially important if there's a chance they may be supporting a company that competes directly with yours. By having this conversation up front, both parties can avoid any uncomfortable misunderstandings or disputes later on.
5. “What Do You Expect From Us if You Invest?
An investment agreement is a bidirectional commitment, and it's essential that you understand and uphold your company's end of the deal. Asking VCs what they expect from your startup if they invest in it is important because it allows you to assess whether or not the agreement is one you're willing and able to commit to. It also provides an opportunity to negotiate terms and conditions that are beneficial for both parties.
Furthermore, asking VCs what they expect from your startup can help you understand how much control they expect to have over decisions such as when and where to allocate resources or hire new employees.
Additionally, their answers can provide insight into their expectations regarding returns on their investment. Most VCs will be anticipating significant growth from your startup in order to make their investment worthwhile. Laying these details bare right away allows you to make more informed decisions about whether or not taking on a venture capital partner is the right move for your business.
6. “Are There Any Successful Startups Our Company Reminds You of?”
It can also be valuable to ask a potential venture capitalist if there are any other companies that your startup reminds them of. The way established investors answer this question can provide valuable insight into how they categorize your company and what types of startups have achieved high valuations in similar markets. Asking this question could also help you tap into the VC's industry knowledge to help you identify potential competitors or partners that might be beneficial for your business.
Additionally, asking a VC about which companies your startup reminds them of is a great way to get a better sense of the kinds of investment opportunities that interest them and what kind of perspective they might bring to your company's journey.
7. “How Do You Act When Things Aren’t Going According to Plan?”
Asking venture capitalists how they respond when things don't go according to plan is a crucial question for startup founders. It serves as a litmus test for a potential investor's suitability for a long-term partnership. The response of a VC during adversity can determine whether they offer more than just financial support — their adaptability, collaboration, and commitment to the startup's success are equally important.
This question also helps founders gauge the alignment of values and principles, which is vital for a strong investor-founder relationship. Asking about how the investor behaves when things aren’t going according to plan promotes transparency, trust-building, and, ultimately, the potential for a fruitful, resilient partnership that can weather the many challenges of the startup journey.
8. “Can You Introduce Me to a Founder Where Things Didn’t Go Well?”
This question is a unique opportunity for startup founders to gain insight into the experiences of businesses that haven't worked out despite the VC’s backing. It enables you to understand how the VC reacted during challenging periods, offering a valuable perspective on their responsiveness, support, and commitment.
The founders of the ventures that didn’t go according to plan are often the best people to talk to. They can tell you whether the VC was proactive in addressing problems, adaptable in navigating difficulties, and genuinely dedicated to the long-term success of the businesses. Ultimately, this real-world feedback helps you assess whether a particular VC's approach aligns with the kind of support and partnership you’re looking for.
Even more importantly — if the VC refuses to introduce you to any founders of businesses that didn’t go well, or seems excessively hesitant to do so, that’s a big red flag.
9. “Are There Any Other Questions We Can Address?”
Coming to a meeting with a potential investor armed with a list of questions shows that you take their investment seriously, and it ensures that you collect all the information you need to make an informed decision about who to accept an investment from. However, it's also important to maintain a collaborative attitude throughout the process.
Ending your discussion by asking the VC if there are any other questions they’d like to address shows them you're interested in reaching a deal that's mutually beneficial, which is a great way to begin your relationship on a positive note. Additionally, it gives the investor an opportunity to clarify any important points that you may have missed.
Why Is It Important to Ask VCs Questions?
Asking questions of venture capitalists is one of the best ways to gain a better understanding of how your relationship with them is likely to progress. By asking the right questions, you can find out what kinds of support they are willing to provide and what sorts of returns they will expect from your business. Furthermore, you can determine if their investment style aligns with your own vision for the company.
It's also important to ask about potential conflicts of interest that may arise from a VC’s investments in other companies or industries and to ask questions about their track record with previous startups they've invested in.
When you accept an investment from a venture capitalist, you're entering into a long-term agreement. The lead investor in a funding round will often provide ongoing support and advice to the founders of the startup in which they've invested. By asking plenty of questions up front, you’re doing your due diligence to ensure the investor is someone with whom you can get along for the entire duration of the professional relationship — not just up until they sign the first check.
Get Startup Funding Advice From the Experts
An experienced mentor can help you navigate the process of securing investment capital funding by offering guidance tailored to your situation. A mentor can provide advice on how to approach potential investors, give feedback on the metrics and KPIs you include in your pitch deck, and share firsthand insights into what most investors are looking for in a promising startup venture. You can get in touch with a world-class mentor today with help from Mentorcam.