This is the second of four posts offering practical advice to early-stage startup founders from an entrepreneur turned venture capitalist. Jonathan Shriftman is a partner at Expanding Capital, a growth stage VC fund that invested in companies like Coinbase, Cameo, Classpass, Postscript and Astra Rockets. Previously Jonathan founded Humin, an AI-powered address book that was acquired by Tinder, and Solé Bicycles, the first direct-to-consumer online bicycle retailer.
You can read the first part of this series here:
Fundraising can be a stressful time. We asked Jonathan for examples of questions startups should pose to venture capitalists when trying to evaluate a potential investor.
When you’re out there trying to raise money from investors, VCs will ask you all the questions. But don’t forget that there are some questions you need to ask your potential investors:
1. Does the VC lead?
Lots of VCs may be interested in investing in your round but they can’t all lead it. The lead investor will be the one that sets your startup’s valuation and will be your closest strategic partner moving forward. They will also likely be your largest investor.
If a fund indicates that they want to be your lead investor, then there is an important follow up question.
2. What percentage of their fund are they investing in your startup?
Sometimes funds make small investment relative to the total amount they are managing. They’ll want to keep a close eye on you. But, generally speaking, you want a fund to make a larger investment in your company.
3. How much does the fund leave for follow-on funding rounds?
A good rule of thumb is a 4:1 ratio. If a VC invests $1M into your company now, they might want to invest $4M in your next round either as an up-round or for additional support.
4. Ask for references from other startup founders
You should make sure to ask the VC for two references. Ask them for a reference to a founder who did really well, but also ask them for a reference to a founder who went out of business. You want to ask that second founder how the VC treated them when their company wasn’t doing so well.
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