Thinking About Thinking

4 Questions and 4 Pressure Tests To Decipher A VC’s Interest In Your Company

Posted in Venture Capital by larrycheng on June 29, 2009

I have heard from a number of entrepreneurs over the past couple of months about how they wished VCs would give them a “quick no” more often.  I think it’s a totally fair critique and have tried to improve in this area myself.  In lieu of a “quick no”, I thought I’d give entrepreneurs 4 questions and 4 pressure tests to help you decipher a VC’s level of interest.  These questions presume that you have already given the VC an initial pitch of your business, so they have enough information to at least be initially interested.  After thinking about this post, I have a renewed personal commitment to make my interest level clear and prompt so that there’s nothing to “decipher”.  A good working relationship should start before an investment is closed – so while I hope the advice is helpful in general, I hope that it’s advice you don’t have to take with me.  If you feel like you do, feel free to call me out on it – I’ll respect you for it.  Without further ado…

4 Questions 

1.  How quickly does the VC respond to your calls or emails? 

This is more of a disqualifying question than a qualifying one.  If a VC consistently takes more than one week to respond to your emails or calls in a normal work week, I’d say it’s pretty safe to disqualify their interest in 98% of cases.  If they’re responding consistently to you with positive sentiments in less than 12–24 hours, I’d consider that a positive sign.  Everything in between is a grey zone, but the more responsive the better. 

2.  Who is investing the time and resources in diligence – you, the VC, or both? 

For a productive process, it should be both.  If the nature of the diligence process is the VC asks you for information, you scramble to pull it together, and that’s it – it’s not necessarily a buying signal.  You want to see an investment of time and energy from a team of folks at the VC firm including a partner.  Such an investment could include: on site visits (especially if air travel is required), spending money on diligence (e.g. legal, technical, financial, etc.), clear commitment of time on diligence calls, or a partnership presentation (which is an investment of other people’s time).

3.  Is the VC making progress “reportable” to a partnership every week?

Most VC firms manage a deal pipeline the same way any company might manage a sales pipeline.  When an investment opportunity progresses to a stage of real interest and opportunity, they raise it to a level internally which presumes some level of weekly reporting to the team.  Once it reaches that stage, the VC has every incentive to make “reportable” progress each week so that they don’t lose momentum internally with their partners.  If you feel like a process is dragging and is slow, then you’re probably not at that level or you have come down from that level and serious interest may not be present.

4.  At the end of the day, do you feel like you’re chasing the VC or is the VC chasing you?

Any VC worth his/her salt knows how to go 110% after a company they want to invest in.  We all know we need to be aggressive in a competitive environment to win the best opportunities.  So, VCs know how to chase great companies.  If you feel chased, consider that the best buying signal.  If you don’t feel chased, then consider a pressure test…

4 Pressure Tests

1.  Ask the VC to sign an NDA. 

I’d say this is the easiest test.  There’s a widely held belief that VCs don’t sign NDAs.  I haven’t found that to be true.  Imagine if a VC said to their LP, “We didn’t invest in Google because Larry and Sergey wanted an NDA and we declined out of firm policy.”  That wouldn’t fly.  The reason VCs generally don’t sign NDAs is that it creates too much complexity if you’re meeting with thousands of companies a year to sign NDA’s for all of them.  But, VCs will sign NDA’s if they’re seriously interested in a company and it’s important to you.  As a ballpark measure, I sign about 1–2 NDAs per month and invest in 1–2 companies per year. 

2.  Schedule a partnership presentation, or specifically outline the process to get there. 

No investment will close without you pitching the partnership.  Many VCs won’t allow term sheets to be issued without a partnership presentation.  Either way, ask the VC you’re engaged with to outline the specific steps and timeframe to a partnership presentation.  If they outline something very clear or even schedule a date, that’s great.  If their answer is hazy or unclear, then they’re not ready to put you in front of the partnership which is where they invest some of their credibility. 

3.  Ask to call references on the partner.

This is a qualifying test rather than a disqualifying test.  If a VC partner lets you call their references, then it’s a clear buying signal because that’s an investment of time from their references (usually their CEO’s).  They won’t use their CEO’s time unless they have very serious interest.  If they’re not ready to give you references, I wouldn’t say it’s disqualifying but it’s a sign that there’s still work to be done before the finish line. 

4.  Reject the VC (nicely).

This is probably the ultimate pressure test.  If you’ve asked the questions, done the pressure tests and your gut doubts the level of the VC’s interest – in as kind and as humble a way as possible, let the VC go.  Just tell them that while you would have liked to work with them, it doesn’t seem like they’re interested, and there are no hard feelings.  Perhaps the stars didn’t align this time, and you’ll keep them in the loop for any future financings.  While I wouldn’t recommend this as a negotiation ploy, I think it’s fair game if that’s how you genuinely feel.  If somehow you have misjudged the situation, and they are really interested – this should kick them into gear.  But, more likely, it will lead to a clear no which is still helpful.