Raising: Evaluating Investors

March 27, 2021

As you start traversing the investor network, the interest level in your fundraise can change rapidly.

In the beginning stages of a network traversal, you may be taking two or three meetings a week. When you start going “viral” within the network and becoming a hot deal, the tables can flip rapidly.

At one point, Kyle and I were taking separate meetings simultaneously by phone in an Uber going over the Bay Bridge because we had twelve meetings that day and that was literally the only way to meet both investors.

It’s a mixed blessing. Lots of meetings is great for selling, but can make evaluation and clear thinking challenging. Everyone knows you’re hot; many will substitute subtle flattery for diligence.

If you find yourself in this position, remember that the tables have turned. More than selling you are now evaluating. You have to understand that VCs are professional salesmen, and they are likely much smoother than you.

Here are a few tips:

Evaluate working style & what makes them tick

Working styles vary by VC. Some VCs sees themselves as connectors — they try to know everybody. Other VCs nurture a few longstanding relationships and prefer to work with close friends. Other VCs like playing the field.

To suss out someone’s working style, walk them through investments they’ve made — and ask them about specific deals, don’t let them drive the conversation — how they met the founder, and what their relationship is like. Ask other founders. You probably have a type of person you work well with.

What makes people tick also varies. Venture capitalists are humans. Some VCs need to be the top dog and engage in constant status games. Some VCs have a chip on their shoulder and want to “prove” themselves. Some VCs feel they’re the “king” floating in the air a little higher than everyone else. Some VCs have a strong sense of profession and want to be well-respected among their peers.

You can suss out some of what makes people tick from their history, level of success, and the way they talk about those around them. Knowing other founders who have worked with these VCs can also be quite helpful. Again, there isn’t a universal “right” or “wrong” answer here.

Evaluate their unique area of expertise

Every VC has some sort of specialty. For example, some VCs are talented at organization-building; others have deep product insight; others have unique domain knowledge in your space.

You should figure out what the unique “value-add” is of every VC that you’re seriously considering an investment from. (“None” is a definite possibility!)

Resume is a good starting point; perhaps in recent memory they were a founder/CEO; an engineering leader; a sales or marketing leader. Keep in mind that experiences degrade; once someone has been a VC for more than ten years, unless they are Marc Andreesen you should generally ignore any previous experience.

Another tell is noticing the kinds of questions they ask you.

There’s a couple tricky things about figuring this out.

First, unusually analytical VC exist, but can be challenging to identify. All VCs are at least somewhat analytical — it’s a professional requirement. Still, a few that stand out — perhaps they spend longer on problems, trend less with the herd, resist handwavy explanations, notice things others don’t, or are just plain smarter. Thoughtful blog posts can be a good tell here, as well as having consistently thoughtful answers when asked about various topics.

Note that VCs are good at controlling conversation flow and bringing up topics they are thoughtful about! It can take a longer relationship, careful attention, or a founder who is quite analytical to suss out the difference between a normally analytical VC and an extraordinarily analytical VC. Or blog posts.

Second, almost every VC has opinions about marketing, but that doesn’t make them marketing experts.

Third, every VC is an expert in finance. Venture capital is a finance job, so asking lots of questions about things like CAC/LTV ratio, burn rate, ARR, or marketplace take rate doesn’t demonstrate unique expertise, it’s just part of the job.

Understand if your visions of success are aligned.

When you work with VCs as board members, they will be giving you advice and asking pointed questions. “Hire a VP Marketing”. “Expand to X market.” “Is Y executive working out?”

In the best case scenario (they are listening to you, your incentives are aligned, and they are trying to be helpful), this advice is based on what they’ve seen work well in situations they feel are comparable. In other words, they pattern-match — that is, they take mental shortcuts to come to conclusions based on limited information about a situation.

That can be helpful if you and the VC are aligned on what “success” looks like:

  • If a VC was an early investor in Robinhood, and you’re trying to be a wildly successful consumer financial app, then your visions of success are likely reasonably aligned.

  • If a VC’s biggest success was an enterprise software firm, and you’re trying to be a wildly successful consumer financial app, then your visions of success are probably not aligned.

If you take investment from a VC, and they are on your board, and they think you’re in a different idea maze than you are, and give all of their advice based on this premise, you’re in big trouble.

The easiest way to suss this out during a fundraise process is to be direct — ask the VC what company you look like to them, and what the lessons of that company are for you. Listen for specific stories they tell. Then, ask for an intro to the founders of the company they reference, and cross-check the VCs’ stories.


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Written by Sam Bhagwat, cofounder & chief strategy officer at Gatsby; programmer, analyst, writer; follow me on Twitter!