How to put a VC in the hot seat

Investors should sit in the hot seat, too. Who you decide to take an investment from can have a huge impact on the future success, or failure, of your company. When the ball is in your court, dribble, don’t pass right away. Ask these 10 questions to a VC and some of them will feel the burn.

“Are you accredited?” Since many companies require less capital than usual to reach milestones, investment amounts and fund sizes are smaller than they used to be. Since fund sizes are smaller, there has been a rise in the number of investors. So if you are talking to relatively new investor, it doesn’t hurt to ask if they are accredited. [Update: Since the proliferation of angel investors, some angels have raised “funds”, and other small funds call themselves VCs. In these cases, this question can become relevant.]

“What’s your background?” An investor invests in the jockey and not the horse. Consider an investor like the saddle. If the saddle sucks, the jockey’s groin will be sore.

“When was the VC founded?” With age comes wisdom. The longer a VC has been investing, the better.

“What is the vintage year of the fund?” Unlike a fine wine, a fund with a recent vintage might be a good thing. The typical life of a fund is 10 years, so if you are on the front end of that, the investor may be a little more patient with you.

“How much capital is under management across how many funds?” Multiple funds are typically a good sign because in order to raise a new one, the previous ones must have performed well. That means LP’s and (some) portfolio companies made money.

“How much capital has been deployed out of the current fund?” This can indicate whether or not the investor would be able to participate in subsequent rounds of financing. If you don’t want to spend a disproportionate amount of your time fundraising, this becomes especially important.

“Who are your LPs?” LPs can range from high net-worth individuals to institutions. There are typically more than a handful of LPs behind a fund and it may be a good idea to understand what the split is, and what the relationships are like. LPs yield a huge amount of power and are often overlooked by entrepreneurs who could be very affected by those relationships.

“What is your investment thesis?” This question should be asked by entrepreneurs, just as often as VCs ask them “how do you make money?”. Typically when a VC raises a fund, it promises their LPs that they will stay laser focused on a specific investment strategy. You should make sure that strategy is aligned with what you are looking for in a partner.

“How many investments have you made in my space?” The more, the better. I realize that entrepreneurs are worried about competitive dynamics, but look for complementary investments that could really help you build the industry relationships that you need to grow the business.

“Can I speak with some other founders you have invested in?” An investor will ask you for references, and you should do the same.