According to data from FactSet, 2021 was a record-breaking year for venture capital, clocking in at $612 billion worth of VC investment activity globally — that’s a 108% increase from 2020, and it’s happening across every major region. For startups and scaling businesses, it becomes increasingly likely that founders will face a decision: to secure venture capital investments or forgo them. The former path calls for equal parts personal introspection, hard research and gut-level business savvy, but these expert-approved questions to ask a venture capitalist (VC) can help get your VC journey started on the right foot.
1. What Do You Look for in a Startup?
This tone-setting question is broad for a reason: It can help reveal the research your potential VC has already done on your company (an indicator of the non-financial sort of investment), open up the conversation to past examples that might be relevant and help gauge the compatibility of your business ethos right from the jump.
2. Can You Tell Me About Your History?
Sometimes, clichés become clichés because they’re true, and the truth is, actions do speak louder than words. You’ve seen this VC’s history written down, but you need to know their history as a series of actions because it’s ultimately actions — not résumés — that will affect your company. As managing partner Micah Rosenbloom of Founder Collective says, “Be suspicious if established investors answer your questions abstractly instead of with concrete examples that demonstrate a track record of ethics.”
3. Are You Willing to Lead?
UpCounsel reminds us that the lead investor of any financing round can make or break your fundraising goals. Because the lead investor commonly sets the terms and pricing for the remainder of the round, it’s an absolute must to establish this from the outset. As a follow-up, make sure to ask about the investor’s experience in taking the lead on financing rounds.
4. What Can You Offer Outside of Capital?
Healthily engaging with venture capital is about so much more than funding; it’s about forging a partnership. At Inc., BaseTemplates CEO Maximilian Fleitman observes that “good advice or experience can be worth thousands or even millions of dollars. To leverage that, check whether your investor can add value — and whether they want to.”
5. Do You Prefer to Take a Board Seat?
After you secure investment, venture capitalists or their VC firms typically have the right to exert their opinion on your company’s operations going forward, usually by taking a board seat (or board seats). While handing out board seats is a serious decision, interest in taking a seat is usually a good sign. It’s much easier for a VC to dole out capital than it is to invest their reputational capital into your company — a board seat represents a healthy level of commitment.
6. What Is Your Due Diligence Process?
You’ve done your diligence, and you need to know that any potential VC will do theirs, too. This question prepares you for what to expect, especially in later discussions. It’s common to request references and some access to both financial and operational data, but this can differ per individual VC. You’ll need to know what to expect so you can prepare for those requests without being caught off guard.
When the time comes, you can streamline your deliverables with a CapLinked due diligence data room, a secure shared space that hosts every document you’ll need to provide for any VCs you’re courting. Not only does this online document repository cover security and access management right out of the gate, it’ll help you avoid common due diligence pitfalls like information overload, distributing hard copies, dealing with incompatible file formats and juggling permissions or access — all of which can cause exactly the type of friction you don’t need to introduce to your prospective VC.
7. Where Are You in the Fund Cycle?
The Capital Network calls this one of the more overlooked questions to ask a venture capitalist, but it could hardly be more important. It can take anywhere from two weeks to two months to close a deal and get seed funding in-hand, or up to eight months for Series A funding. This timeline can have a massive effect on your quarterly budget or even beyond.
8. What Percentage of the Fund Are You Allocating for Us?
Yes, more capital for your business is good. But the meat of this question — and a key theme in feeling out a potential VC — is how it assesses their personal investment. The higher the percentage, the more likely you are to find a VC who is willing to invest time, energy and social capital in your company, not just money.
9. What Do You Expect from Us?
At its best, the venture capital funding process is a two-way street. Yes, you’re coming up with questions to ask a venture capitalist, but you’re not here to grill them — you’re here to partner with them. Set expectations from the beginning to avoid conflicts cropping up in the future.
Do More than Ask
Speaking of two-way streets, diligence isn’t just something for the VC or their firm. Do whatever diligence you can before you come up with your questions. CapLinked can help accelerate that due diligence process and startup fundraising by keeping all of your VC (and other) contacts in one place as it organizes important files and notifies your prospective investors when you make changes. By setting up a CapLinked workspace just for your investors, you can control what they see and easily invite them to have a look without running up against complicated software hangups.
The prep process will not only show that you’re present, interested and invested, but bringing up examples from the VC’s history will personalize the experience and help the conversation blossom into unexpected, often insightful directions. And that’s exactly what this process should be: not a one-sided interview about a binary transaction, but a layered, complex and ultimately revealing conversation among authentic human beings.
For help with storing, managing and optimizing your VC investment, try a CapLinked Virtual Data Room!
Dan is a small business owner and freelance writer based in Dallas, TX. In over a decade of experience, he’s been fortunate to write and collaborate with business-facing brands including The Motley Fool, Chron, Office Depot, Fortune and more.
The Capital Network – 5 (Less Obvious) Questions to Ask VCs