How to check the investor before the deal. Checklist for a startup

KYI (know your investor). Don't rush to take money from investors without doing a simple check.

I'm sure you've heard more than once about the new winter in the venture capital market. And while the Crunchbase study shows that startup valuations have not fallen - the amount of deals is shrinking. Capital is going to the best, and the mediocre ones are being asked to go into cockroach mode.

We (Flyer One Ventures) help develop plans for the new reality by adapting financial forecasts and implementing more rigorous planning in OKR.But we do not recommend taking any money from any investors.

Many investors openly appeal to entrepreneurs: take the money if you can. But even in a critical situation, I urge you to be careful and check your potential investor. Below is a short check-list of 25 points, which I suggest every startup to fill out by answering honestly about its potential investor. The final choice is still up to you, but let it be more conscious.

Let's go!

Money

1. Money has an understandable origin. The VCs do not publicly disclose their LPs. But you can get to the origins if you want to.

2. The VC participates in subsequent rounds. Or it doesn't. It's a matter of having an understandable follow-on strategy for investing in your project. The main thing is not to form false expectations. Information can be checked against previous portfolio companies.

3. Getting money is technically simple. As a rule, it's a matter of jurisdictions. This is a very important technical point that will save a lot of time.

4. The VC has a clear and recognized method for valuing a company. At an early stage, the valuation is always a negotiable thing. But if the VC knocks down the price, it can argue the reason.

5. The check on your deal is a weighty amount for the entire fund. It also depends on your expectations. If the VC invests in a “spray and pray” model, don't expect much involvement. If 10% of the entire fund is invested in your startup - that portfolio company will be defended by investors to the last.

Reputation

6. The VC has no public controversy. Investors really don't like public disputes with founders. Why should you put up with that on your end?

7. Positive feedback from other VCs. Minimal - can't say anything bad, optimal - willing to go into syndication with the VC being researched.

8. Positive feedback from active portfolio companies.

9. Positive feedback from closed portfolio companies. Be careful with this source of information. There can be a lot of emotion.

10. You clearly understand how this VC is different from dozens of others. It has an "unfair advantage" too.

Track Record

11. The VC makes deals. Unfortunately, there are many investors on the market that are active in publicity, but for some reason do not invest.

12. The mortality rate in VC’s portfolio is not higher than the market rate. Mortality can have a host of reasons. But you also play the risk game - you don't want to pick the ones that don't pick well.

13. The VC has home-runners (startups with a potential return of 10x+), not just zombies (undead companies). Just analyze the portfolio - how alive and vivacious the companies in it are.

14. The VC's portfolio companies attract follow-on investments. There is no goal in investing itself. There is a goal in asset growth (Net Asset value). If the VC has no exits, at least the startups make it to the next rounds at a higher valuation.

15. The VC has successful exits. The main measure of an investor's success.

Help

16. There are proven cases of assistance on request. You came with a problem - they really helped you.

17. There are confirmed cases of assistance with initiative from the VC. Depends on your need. Maybe you need passive participation. The first two items in this block describe the tactics of assistance from the VC. You need to decide if it's a good fit or not.

18. The VC supports portfolio companies with “bridges” when needed. Some VCs have an unspoken and sometimes public prohibition on such actions.

19. The VC not only takes part in subsequent rounds, but also helps collect them. Ideal scenario. The higher the round, the more time and money you have to spend on it. A good VC helps with this process as much as possible.

20. The VC doesn't turn you into an outsourcer who is given directive instructions. About the "help" strategy. Analyze how the VC behaves in the companies where it got a seat on the Board of Directors.

VC’s team

21. The VC’s team has a mix of financial and product experience. These people understand your business and how to make money from it.

22. The team has a unique knowledge of the market that you don't have. You almost always know more than the VC. But the VC's knowledge is unique.

23. The VC has a clear structure of stages in the deal flow. The worst thing is when you get hung up in a Nosferatu (undead) deal - there seems to be a negotiation process going on, but it's not clear what stage everything is at.

24. The VC has a clear focus, and you understand it. A good investor has good discipline, he does not rush from side to side for every interesting opportunity. The focus may be based on the VC's competences and connections.

25. How often the VC takes a seat on the board and who takes it. That's the person you have to live with. Literally.

That's it.