10 questions early-stage founders should be asking investors

When I wrote this post in August 2021, we were at the peak of exuberance in VC investing and startup valuations. I bemoaned the decline in early-stage investing and feared that innovation would suffer as a result of it.

The VC industry is turning back to its roots of investing at the early stage, although activity is still dramatically lower, with Q1 US 2023 data showing a 53% decrease in deal value and a 52% decrease in deal count at the seed stage year over year. Similarly, we’re seeing a 60% decline in deal value and a 47% decrease in deal count at the early stage of investing year over year. While I welcome this focus back to early-stage investing, I am sorry that it has come at the cost of hundreds of thousands of layoffs and continued challenges for startups.

However, I am sounding another note of caution today. As a pure inception-stage firm that has partnered with founders for more than five decades and guided over 225 companies to successful exits (including 120 IPOs and over 225 acquisitions), I know that early-stage investing is a craft that is honed over time, not a hobby or tourist destination.

Similar to a master chef or carpenter, the ability to work closely with founders at the fragile stage of company formation until they bake the perfect soufflé or build a bespoke coffee table takes time, skill and patience.

It may not be the right mode for every investor and is best pursued by those who believe that company building is a marathon, not a sprint. In an era where everyone’s dollars are green (albeit with fewer floating around today), I believe it is important to help founders with ways to evaluate investors before committing to a partnership.

Let me share some specific examples of what it means to be a “roll-up-your-sleeves” inception-stage investor:

1. A semiconductor company with a breakthrough chip for cooling devices is evaluating where to establish its first beachhead. Over a multiday whiteboard session, we work with the founders to go beyond the obvious and attractive large market of smartphones to settle on the smaller market of surface devices as their initial entry point. This is informed by our experience in working with other inception-stage chip companies, as we know how long it takes to go from design to tape-out, and then to scale production to fulfill the needs of hundreds of millions of customers.
2. A consumer fashion marketplace has ignited the love of its community of seller stylists, but its e-commerce infrastructure is breaking down. Its CEO has just raised a round of financing based on growth projections but now tells the board that they need to slow down to strengthen the platform. In a growth-at-all-costs environment, the inception-stage investor, a former three-time serial entrepreneur, knows that the journey often takes a decade or more for a successful outcome. Consequently, we are willing to support the CEO in a slower growth plan, knowing it is so that they can build a sustainable marketplace platform.
3. An enterprise software company needs to go beyond its known networks to rapidly attract top-tier entry-level talent to scale its business. We design a program for college campuses where we partner with the career centers to host many custom immersion days, thereby attracting hundreds of qualified candidates for consideration.
4. An inception-stage cloud company needs help refining its value proposition and defining its insertion point to get to product-market fit. We arrange more than 50 conversations with the precise C-level buyer persona to help with this process so that when the company debuts, it does so with early customers and a go-to-market motion that accelerates mainstream adoption.

These are just a few examples of playing strategic sounding board, patient investor and value-added partner, but there are hundreds more from our experience. So when a founder is evaluating an investor for an inception round, here are some non-obvious considerations:

1. Has the team at the VC firm ever founded a company and nurtured it to a successful exit as entrepreneurs?
2. Have they ever invested through downturns?
3. How many investments does each investor make per year? Does every company count in their model?
4. Can the firm provide you a list of inception-stage founder references?
5. Does the firm have a few breakout companies with similar characteristics at the inception stage of investment and sector to yours?
6. How do they specifically add value as board members along with their portfolio services teams in talent, marketing and business development?
7. Can their founders tell you if they work solo or as a team with everyone available to help you?
8. How do they act when things are not going well? (Talk to those founders especially.)
9. Do they take a long-term view and are they patient investors? Do they see company-building as running a marathon, not a sprint?
10.  Above all, try to intuitively assess: Will they watch your back, or are they going to be evaluating you constantly?

While it might seem daunting for founders to question potential investors in today’s climate, remember that you need to build a mutual zone of trust for the long journey.

Equipped with this knowledge, founders need to also trust their instincts when picking their inception-stage investor, as chemistry plays a key role in the founder-investor partnership. With that, we invite founders to lean in so we can build a bright future together.