Ask an Investor: How do I perform due diligence on a VC?

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Welcome to a new BetaKit weekly series designed to help startups and entrepreneurs. Each week, investors Roger Chabra and Katherine Hague tackle the tough questions facing founders today. Have a question you would like answered? Tweet them with the #askaninvestor hashtag, or email them here.


Investors conduct due diligence on the companies they invest in; in fact, many conduct over 20 hours of due diligence on a single deal. Your investors are looking into you and what makes you a fit for their portfolio, and as an entrepreneur raising money, you should also be conducting due diligence on potential investors.

While any money can look like good money at first, not all investors are created equal and your ability to vet out investors that are not the right fit for your company early on will save you time in your fundraising, and many headaches down the line.

While any money can look like good money at first, not all investors are created equal.

Before we dive into exactly how to conduct due diligence on a VC, let’s first talk about what you’re actually looking to uncover during your due diligence. Vetting a potential investor comes down to 8 things; Personality Fit, Domain Experience, Activity, Track Record, Stage, Tenure, and Fund Hierarchy.

1. Personality Fit

The first factor you should consider when evaluating an investor’s fit for your funding round is personality fit. Picking your investors, much like picking your co-founders, is like getting married. For better or for worse you’ll be working together until the company dies, one of you leaves the company, or you reach a liquidity event. You want to work with an investor that is excited to work with you, who you’d want to have as an advisor, and who you wouldn’t be afraid to go to when things get tough.

2. Domain Expertise

Second, you’ll want to look for investors that have domain expertise in your industry. You want investors that are knowledgeable about what your company does. Either they have operated a company in the space, have invested in companies in the space before, or have related experience that makes them valuable to your particular business.

3. Activity

Unfortunately many investors, angels, and VCs alike will claim to be actively investing — meeting with many entrepreneurs — but rarely actually writing cheques. These investors are wasting your time. Make sure the investors you’re contacting have written a cheque in the last 12 months.

4. Track Record

Some investors have better financial performance than others. They have had more successes, are more respected, or more connected in the industry. These are the investors you’d prefer to work with. You don’t want to be working with investors that have bad track records or reputations, as it could affect your credibility.

5. Strategic Fit

Strategic investors can add a lot of value beyond money. Is the investor well-networked with one of your potential acquirers? Are they a potential acquirer themselves? Can they open doors to new clients? Will they help to position you better in your industry? Some investors will give your business a strategic advantage, making them more relevant targets for your list.

6. Stage

Stage relates to both your company’s stage, and the stage of the investment fund you are talking to, if you are talking to a fund.

When raising your round you want to talk to investors that are commonly part of seed and pre-seed deals and who are comfortable being the first cheque into a company. You will waste time by talking to investors who only invest in later stage rounds.

When it comes to fund stage, it is better to receive venture financing from a venture fund that is still early in its lifecycle. Most venture funds are set up to exist for 5 – 10 years. The first 3 – 5 years of the fund are the years during which the VCs actively invest, and the remaining years are the time when the VCs harvest, seeking a cash return from their investments to return to their investors [known as Limited Partnerships or LPs].

The closer a fund is to 5 – 10 years of age, the more pressure you will face to provide a liquidity event. Not only will getting investment from a fund early in its lifecycle decrease the pressure on you to accept a premature liquidity event, but getting money out of a fund early (before they have made all of their investments) also means that the fund will have more money in reserve when they invest in you. The more money the fund has uninvested, the easier it will be for you to go back to that investor and ask for follow-on funding.

7. Tenure

Tenure refers to how long an investor, typically a VC, has been with their current fund. Some entrepreneurs might prefer to work with a VC who is respected, but still early in their career, someone they can build a long term relationship with. Others may prioritise working with a very seasoned VC with more connections. VCs that are just launching a fund, or starting at a new fund can also be a great place to start because they’ll be looking to make investments now to start their portfolio. That said, they may be looking for safer bets than a VC with a long established track record. Different things will matter to different entrepreneurs, but it’s important to be aware of tenure so that you can make an informed decision.

8. Fund Hierarchy

The typical career path at a venture capital firm is very structured and the primary roles include; Analyst, Associate, Principal, Partner.

Most established firms require that newcomers to the industry start at the bottom of the firm hierarchy, working their way up to partner. Smaller firms and younger firms, like 500 Startups, are usually willing to take a chance on newer players to the venture capital world.

Analysts are not part of the investment team at a firm, and are rarely involved in an investment decision. Associates are at the bottom of the hierarchy when it comes to the investment team. They usually do not have the discretion to write checks. When evaluating VCs and creating your target list, you want to be working with Principal level VCs and above, ideally connecting directly with partners who have the ability to sign off on deals.

That said, you need to be respectful of all people within a firm. Flat out refusing to meet with an Associate, or being arrogant or disrespectful to lower level firm employees will not go over well. Word about your behaviour will travel quickly throughout the firm and the venture community.

Side Note: Another very important role within the venture firm not listed here is the Executive Assistant. Executive Assistants have a lot of power. They effectively control the VCs calendar. Be nice and get on their good side. They can get you a meeting, when otherwise the VC would have been booked – and can make sure your email gets answered, even if the investor missed it initially.


Silicon Valley

While any money can look like good money at first, not all investors are created equal.

Now that you know what you’re looking for what conducting due diligence on a VC, let’s talk about how to actually get started.

First off, don’t be afraid to tell a potential investor that you are doing due diligence. In fact, the best investors expect that you would do due diligence and are generally very happy to help facilitate, by either answering any questions you have or by providing references.

Don’t aggressively start due diligence before the investor has expressed serious interest. Get them excited first.

Before you start asking questions directly to the investor, ensure that you have done your own research and avoid asking for things that could easily found online and it will make you seem unprepared. Most serious investors have some sort of online presence that can be easily searched to gather basic information on the investor. You’ll want to look up the investor’s firm, look into any press that might have been written about them, read their blog and follow their social feeds.

You’ll also want to look into an investor’s background on third party sites like CrunchBase, AngelList, LinkedIn or The Funded. It’s also prudent to reach out to trusted advisors in the startup community that may have worked with the investor in the past to get their off the record opinion on an investor. If you are part of an accelerator, you will also find that alumni tend to be very open about sharing their experiences with investors.

Don’t aggressively start asking due diligence related questions directly to the investor before the investor has expressed serious interest in an investment. Grilling them too early will make you look too forward. Get them excited first.

Finding no information online or through in-person references validating the credibility of a potential investor should be seen as a red flag. Ultimately, you will need to weigh all of the information you collect against your own gut instinct and interactions with the investor, as well as the other options you have on the table at the time.

Depending on what you are able to find yourself online or through your own sources, here is a list of great questions to ask a potential investor to begin accessing their fit for your company’s investment round.

  • How old is your fund?
  • What is your typical decision-making process?
  • How actively involved are you with your portfolio companies?
  • How do you think you can help our company?
  • How do you approach follow-on investments?
  • How much follow-on investment do you think our company will need to succeed?
  • What is your typical cheque size?
  • Are there any other investors you typically co-invest alongside?
  • What do you think of our founding team? What would you consider our strengths and weaknesses?
  • Can you provide any references of founders you’ve previously invested in?
  • Can I talk to any of your portfolio companies that have failed?

Roger’s Take:

Roger ChabraYou’ll learn the most about a potential investor by talking directly to the founders she has invested in previously. Just like any type of reference checking, be sure to focus on “off-reference-sheet” calls – meaning, if you can find a way to connect directly with people who have worked with the individual previously, but whose names haven’t been given to you directly by the person you are doing the reference call on, you stand the best chance of getting a fully unbiased and balanced view.

In the case of investors, be sure to seek out founders who took money from your prospective VC but whose venture went through tough times, a pivot, or, whose company ultimately failed. All companies, regardless of outcome, go through good and bad times, and you need to get a sense of how your potential investor will act during times of collective company stress.

Did the VC offer a bridge or extension round in cases where a company wasn’t performing to plan? Did they work actively to find alternate business plans for the company? Was your investor readily accessible in good times and bad? Did they treat everyone with respect and fairly during a failure? In the event of company wind-down, did they pay their share of statutory and board liabilities to the government and employees? Before signing your term sheet, these types of questions (and more) are what you need to have good answers for.

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Katherine Homuth

Katherine Homuth

Katherine Homuth is a serial entrepreneur, angel investor, and the founder of Female Funders, an online destination dedicated to inspiring and educating the next generation of female angels. She is the author of O’Reilly’s upcoming book, “Funded: The Entrepreneur’s Guide toRaising Your First Round”. Prior to leading Female Funders, Katherine founded ShopLocket —acquired in 2014 by PCH. Katherine has been named one of the Women to Watch in Wearables, one of Canada’s Top 100 Most Powerful Women and one of Flare’s Sixty Under 30. She has been quoted in the New York Times on fashion tech and was recently interviewed for the Oprah Winfrey Network. Find Katherine online at katherinehague.com.