Today more than ever, there are many different funding options for early stage startups. Venture firms alone have invested more than $33 billion in U.S. startups through the first three quarters of 2014, already surpassing the $29.8 billion total that VCs invested in all of 2013. The main reason for this increase in venture funding is the emergence of more non-traditional investors, like hedge funds and mutual funds, according to MoneyTree.com .
With the influx of new VCs in the arena, how can you tell which VC is right for your startup?
1. They have good references from startups and VCs.
Get a reference before you ask for a meeting with a VC. What do previous or current companies they’ve invested in say? Other key questions include:
Do other VCs they have worked with commend them for their collaboration?
Have they made historically successful investments? What is their track record?
Where is this company at in terms of overall performance?
What stage is the VC fund in? Do they have reserves?
Nobody’s perfect, but you’ll be able to tell pretty quickly if a VC has a history of being fully committed and supportive of their companies, or bull-headed, arrogant or otherwise difficult to work with. While different VCs have different styles, I’ve found very little gets done with an incompetent person in the room.
2. First, they listen.
One of the undervalued skills of a good VC is listening. The difference between making a directional change and having some much needed time away lies with a good listener. It also means that you understand the value of letting the CEO lead the company.
A good VC will only interfere when necessary, not at every opportunity, to simply express his or her opinion. They’re also not concerned with bull rushing their way into the company or always being right. That is important because innovation is happening at a staggering pace, all around us, and not just on the product/service side of things. Innovation is changing even business plans and the way money is made.
You can’t simply apply what has worked previously in another scenario. Listening to the market, customers and other members of the board are all vital to succeeding in the good times and the hard times.
3. They do not run at the first sight of blood.
Test their commitment to your idea, company and the team: Do you see them talking about it or actively promoting your company? Are they just as excited about growing the company as you are? Will they be your "fox hole buddy" when things get tough? The right VC will be very excited about partnering with your company and will bear down with you when things get hard. Because times will get hard!
4. Their focus is your success.
A good VC knows that their job is to work for companies, not the other way around. The main concern should be how to make a CEOs insanely successful. They key lesson a good VC learns quickly is this: how can I do more with less intervention. If you only engage at strategic points, it prevents you from meddling too much, becoming a pure distraction, or worse, a dictator.
The people you put with you at the table make all the difference in the result of your company. That’s why it is so important that startups know how to build an effective board. There are certain personalities unhelpful to have at the table but by far the most harmful is the one that sees their success as more important than yours.
An investor should be careful to “Do No Harm.” I’ve found that many other respected VC feel the same. If you have serious concerns about the VCs interested in investing in you, it is worth considering if venture capital is even the best way for you to secure financing. There are a lot of options for early stage companies, more than ever before. The future of your company will depend upon the people you choose to partner with. Selecting those people is a decision worth putting every thought and consideration into.
Related: 4 Common Venture Capital Myths