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Investors and entrepreneurs began 2022 bright-eyed and optimistic as startups raised nearly $13 billion in the first quarter, making it the fifth-highest quarter for funding on record.
However, talk of a pullback in global venture capital has become louder and more widespread of late. It’s clear that the cash is not flowing as freely as it once was, and that has changed the landscape for ambitious startups looking to build and scale their propositions.
However, a challenging economic climate doesn’t necessarily mean that startups should accept the first offer that comes along, settle for lower valuations or bring on investors that have different values and ambitions for the business. It is now more important than ever for every party to approach the negotiating table with clear questions and expectations.
Here are three firm but fair questions that founders should consider asking their potential investors:
What value can you provide besides money?
It is important to remember that VCs don’t have an endless pot of money — they are at the mercy of their LPs’ liquidity.
Most investors worth their salt will demonstrate that they come with more than just deep pockets — value such as sector expertise, business experience or a global network. Founders should feel confident about proactively asking about what an investor can provide, particularly the networks and introductions potential investors can facilitate.
There is a significant difference between an introduction that was facilitated via an email and a clear handoff to someone whose relationship with the investor is deep and based on many levels of trust. Many investors pride themselves on having a robust and lucrative contact list, but not all introductions are the same — a LinkedIn profile rarely demonstrates the depth and quality of an investor’s network or knowledge.
My advice is to be clear about your commercial goals and push potential investors to offer names of individuals or organizations that will deliver the impact you’re looking for. For example, we recently introduced one of our portfolio companies to an $80 billion infrastructure firm with which we had developed deep relationships in order to set up pilots in a number of regions.
Introductions should not just forge connections; they should deliver tangible commercial impact.
How secure is your cash?
It always surprises me how many founders believe VCs are sitting on piles of cash that they are ready to distribute at any moment.
It is important to remember that VCs don’t have an endless pot of money — they are at the mercy of their LPs’ liquidity. It is therefore sensible (and necessary) to have answers to three key questions: