Venture capitalists add value in a number of ways. For example, one of my business’ backers has a deep tech “pod” that generates events and content we are always welcomed to be a part of. Another one of our investors gives us full commercial support through its network of mentors that are there to support the business, not the VC.
Due diligence works both ways, and entrepreneurs shouldn’t be in a rush to take investment from anyone that offers it.
I might not expect that from every VC, but if they promise those “assets” by saying that they are here to drive innovation and growth, then I expect them to deliver, just as I have to back up the claim of having a team of supersmart machine learning researchers.
They might know the forks in the road, directions to take, and who to speak to based on having been through the process with similar companies. They might have venture partners that can mentor you and a network of investors that can participate in follow-on rounds. That is where they add value.
The best ones will seek to connect with you personally. They’ll have prepared thoroughly beforehand and are brimming with questions. While they may have preconceived and potentially ill-informed ideas, they demonstrate enthusiasm by starting sentences with “what if,” and they leave me emboldened but contemplative. I fully expect to be provoked in the right way.
However, some also play God. One experience offered up a major warning sign, one that would make me walk on by.
I’m pleased to say my business has some outstanding investors who totally get it. Our investors’ head of investment told representatives at one of New York’s top funds that one of their leading deep tech portfolio companies was coming to town for a “blitz meeting session.” They announced that they were committing to the round I was raising and that we were looking for a new lead investor.
So, put it this way: I wasn’t a guy who walked off the street with a crazy idea, but you might have thought otherwise, given the experience that followed. To be clear, I don’t expect all VCs to open their arms and embrace everyone, but there are rules of engagement.
The transparency and value of DocSend
After a very positive morning meeting, I’d scheduled a couple of hours for a quick chance to grab a breather at my hotel. Flicking through my phone, an email from the associate at the VC I was due to meet next pinged into my inbox.
“Hey Ofri, it’s Jessica [not her real name], really sorry, I’m not feeling great so am thinking I might cut the day short. I know you’re only in New York the next two days, so let’s catch up later on a call and next time you’re over I’m sure we can revisit.”
I started composing a polite response: “Really sorry to hear that. Absolutely fine to reschedule. Let me know your availability, etc., etc.” In truth, I was irritated — this had been in the diary for two months and was one of six meetings scheduled. I was not sorry; I was annoyed.
Soon after, I received a push notification from DocSend that let me know Jessica had opened my deck only two minutes before she’d emailed. (If you don’t know already, there’s no place to hide with DocSend and the insight it provides can help shape conversations with VCs and anyone else with whom you’re sharing material.)
I could see which slide she was on and which pages she’d spent the most time viewing: 0.01 seconds on the proposition and just 40 seconds on the revenue table, the last thing she looked at. She didn’t look at why the revenue was where it was at that point, or what we were working on (you can read about my pivot story for more on that). It’s pointless just focusing on the revenue slide if you haven’t taken the time to understand the bigger picture.
At that point, I decided: “Screw it, it’s only two hours until the meeting and she doesn’t know I’ve seen her note — I’m going!”
Since I was visiting from the U.K., I’d just say I was busy, the internet wasn’t working, and I hadn’t seen the message. I was a block away from the office when another email landed: “Hey Ofri, just checking you saw my note. I’ve left the office as I feel terrible, so don’t want you to come here for nothing.”
For a split second, I questioned whether I should let it go, quickly overridden by “I’m already here.” I got myself into character, hotspotted my phone to download the presentation, repeated the story about the internet to myself, and put the phone on airplane mode to avoid getting a WhatsApp notification in the middle of relaying my issues with connectivity.
After I strolled into the reception area, their all-American welcome turned awkward when I stated who I was there to see. “Did you get an email by any chance?” After I shared my explanation about my phone, I was shown to a meeting room.
Minutes later, Jessica arrived with a coffee, the picture of good health. “Hey Ofri, I’m so glad you’re here. I wasn’t feeling well and was about to go home. So great that you didn’t get the emails as it would have been such a shame to miss you.”
Halfway through our discussion, she acknowledged that she “completely misunderstood” our company. “Let me get our head of AI in here too as he’d love to hear this,” she suggested. Before the end of the meeting, it was me, her and two partners from the fund. I was there an hour and a half.
Knowing when it’s not right
After I returned to the U.K., we had a nice follow-up. They offered due diligence and pre-terms (none of the big VCs want to have to retract a term sheet). But ultimately, I didn’t feel right taking money from them.
The moral? I realized that they hadn’t taken my business seriously. No matter how relevant it was to their head of AI, little effort had been made. But other VCs got the appropriate partners lined up and ready.
While having this VC on the cap table might have been game-changing, it was a clear warning sign because the relationship between investor and investee is critical. Due diligence works both ways, and entrepreneurs shouldn’t be in a rush to take investment from anyone that offers it.
Spotting the warning signs
As CEO, you go to bed every night with your investors, so chemistry is everything. You need to know early on who will be on your board. Who are your sitting partners?
I’ve already had experiences with taking money from “bad” VCs. I once met with an investor who had been in the Israeli army, as I had. In training camp, we had a protocol where if someone looks depressed, you’d keep two sets of eyes on them at all times. After observing me, he said he’d have had me watched, and it was the right call: I had a sitting partner applying almost unbearable pressure. As a result, I was fighting with the team and arguing with my co-founder. If they choose to, VCs can hold you accountable and be supportive.
VCs should be aware that when an entrepreneur takes their investment, they should be seeking out the founders who didn’t get the follow-on round from you — not your existing portfolio companies. Otherwise, they’re doing themselves a disservice. Entrepreneurs should speak frankly to VCs, and if there’s hesitation in their tone, beware. The only way to judge a VC is knowing how they handle fans covered in shit. I knew one of my existing investors had done everything to try to salvage things for one company and didn’t find a buyer. That’s crucial.
It’s quite a simple bit of research if you look on AngelList, Crunchbase or Pitchdeck. Pick a company that had investment from the VC you are considering, but ended up not succeeding. Don’t ask to be introduced.
When it comes to meetings, if they cancel late or leave you waiting, it’s a sign, just like being asked generic questions that demonstrate little or no understanding of the proposition. If they critique you or your business, that’s fine (obviously), but make sure you find out what’s behind their assertions to judge how well informed they are. If you’re going to face these people each month and debate the direction in which you want to take your business, the least you can expect is a robust argument outlining precisely why you may not have all the right answers.
I’ve experienced enough of the funding game to know that if you fail to spot the warning signs, you’ll live to regret it. But do your due diligence and work constructively with them and, together, you might actually build a sustainable future.