Behind the scenes #9 | Due diligence on VC funds
היIn order to run a marathon, it is not enough to lace up a pair of sneakers and grab a bottle of water. You must learn a great deal and train a great deal more if you want to make it to the finishing line – plus, you need some cash to pay the entry fee and an assistant who will hand you extra water and towels along the race route. Which is a lot like running a startup and securing suitable investors.The question is – how can we tell which investor will stick with us all the way and keep topping up our bottles whenever necessary? This is what we will try to answer today.TDJ Pitango Ventures team
Due diligence on VC fundsIt is no secret that each promising startup, once its pitch deck has reached investors, is very carefully vetted. Analysts verify data, forecasts, plans and above all – your team. They will ask around to find out what is being said about the project and the people involved. At TDJ Pitango Ventures we devote a great deal of attention to each potential partner in order to ensure that we are cooperating with founders who will work in harmony with our organization. Why should this same mechanism not work the other way?More and more VC funds keep on appearing year after year, investing more and more capital in startups.As an outcome, the competition between investors is increasing. At the same time, founders now have a real opportunity to make conscious decisions who to turn to and share their ideas (and shareholdings) with.In some way, it is reminiscent of the current situation on the labor markets – for some time now, CEE has seen a low rate of unemployment, which has led to employers having to do their best to secure the best staff. Impressive salaries are no longer enough to achieve this aim – candidates for jobs check to see how companies are run, what values they promote, what people think of them and what sorts of benefits they offer their employees. This sort of knowledge is secured long before they attend interviews, or even send their CVs in to recruitment.We think founders should follow the same path. Begin with thorough research and learn all you can about the funds you are sending your pitch decks to. Before you sign a term sheet, do not be embarrassed to ask for references or to meet the founders of startups from each investor’s portfolio. Are they in it for the long run? Or more a bit of a sprint? Do they continue to offer long-term support, or appear only when major problems pop up?You should also talk to organizations you know or existing investors. Founders and business angels from our network have approached us in the past for information about VC funds they had received a term sheet from. Which is also OK.Good investors should not mind such queries – if they have nothing to hide, then they will introduce you to their founders without hesitation. Otherwise, you can always reach such people independently, through your networks, LinkedIn or simply by calling a company and arranging to meet with them.Choosing the right investor is not just about the sums you’ll receive as investment, the rules governing your agreements or the support they can offer – do also remember that in the next round potential investors will be reviewing who your existing investors are, based on the experiences and opinions others in the sector have about them.
If you are engaged in investment discussions with a VC, go talk to several founders of their portfolio companies. You will know if this is the type of investor you want to spend the next years working with. Wojciech Fedorowicz
The cliché is that investor relationship is like a marriage. So don’t spare your energy and check how the VC behaves as a partner. After the investment is first done, you are all on the same side of the tale, and for a long time. My experience on VC relationships is what starts well may continue well or may sometimes degrade with time. What starts on the wrong foot, will mostly degrade. Wishing you a great choice!Daniel Star
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