The relationship between entrepreneurs and venture capitalists often seems almost mystical, one in which business owners feel compelled to yield without question to the wisdom-and wallets-of financiers. But in truth, you should evaluate potential investors as you do any other professional service provider, says Stever Robbins, owner of Cambridge, Massachusetts-based VentureCoach.com Inc., which coaches executives on, among other things, how to pitch to investors.
When you're evaluating investors, says Robbins, talk to other companies they've funded to find out the following:
- Are the VCs helpful and easy to work with?
- What kind of responses do they give when the company runs into problems? Are they cooperative or adversarial?
- When the entrepreneurs need the venture capitalists' help, do they get the attention of a partner or just an associate?
In addition, Robbins suggests obtaining a referral to one of a venture firm's former portfolio companies that didn't work out. "First, you want to know if the VC is willing to disclose its imperfections," says Robbins. "Then ask the departed company how the venture company dealt with the firm when it ran into trouble." The answers to these questions should give you a more complete picture of who and what you might have to deal with if you decide to work together.