By Karl Noronha, VP of Strategy & Operations, B Capital Group & Cintantya Probohiswari, Associate, B Capital Group

Sir Alex Ferguson was arguably one of the greatest sporting coaches in history.  Between 1986 and 2013, as the manager of Manchester United, he won 13 English premier league titles and made the club one of the most globally recognizable brands in the world. He took Manchester United from a team that was able to win games and the occasional championship to a club with a systematic formula for success. During Ferguson’s time, United recruited and developed young players, providing them the time and conditions to succeed in the English league. He brought David Beckham to United as a trainee as an 18-year-old.  And after winning 6 premiere league titles, 2 FA cups and 1 European Cup, sold to Real Madrid for £24.5 million 10 years later. Ferguson did something similar with Cristiano Ronaldo, buying him for £12 million in 2003 as an 18-year-old, before transferring the striker to Real Madrid in 2009 for £80 million at the age of 24.

From our experience in VC, the best venture capitalists operate like Alex Ferguson – they build institutions not businesses, they see potential, and they train the next generation of founders to attain their vision. They understand the space, have the know-how to develop people, and come with a network that startup CEOs desperately want. For the best VCs, it’s not only about being known for exits and above-average returns, it’s about building the FMCG, healthcare or logistics companies of tomorrow. The companies they create, the people whose lives they touch, and the legacy they can pass on are what motivate the best investors to get out of bed every morning.

As a founder today, there is a lot of money available to help you grow your business, however, the critical question is – which VC will nurture you and get you to where you need to go? We found answering the following 4 questions will help you make an informed decision:

• What do you want your next VC to bring to the table?
• Do they believe in you and the vision you are trying to create?
• Do you understand how the VC works with their founders?
• What do your peers say about them?

#1 What do you want your next VC to bring to the table?

Most VCs will ask you the same set of questions during their due diligence. Everyone is interested in learning about the size of the total addressable market, traction and growth to date, product/market/founder fit and the strength of the leadership team. And that makes sense because all investors are trying to understand: if I put in money today, how large will the multiple on invested capital be, and what could I do to de-risk the investment? But what great investors do next is start asking execution questions to unveil opportunities or problems that better indicate whether a business will be able to scale.  And they can only do this if they have run a company before – 62% of VC partners have previously worked in technology companies and 22% of them had founded/co-founded a company before becoming VCs^[1]. These people have the necessary background and expertise to help founders solve their problems and can offer perspectives on how to do things and anticipate what is coming next before others recognize it. So, don’t be afraid to ask whether they have the right experience and savvy for your industry.

Questions to ask yourself

• Are the people you are interacting with inherently curious about how your business works?  Have they seen the movie before (in some form) and are they able to share some of the challenges that lie ahead?
• Do they understand your industry and business?  Investors who work across geographies and sectors rarely have the depth of experience, knowledge, and network to coach you effectively.  A VC firm that hires specialists to enable the firm to play across industries and geographies bridges that gap.
• If they are just offering money, is that what you really need right now? We’ve seen that 60% of founders do not pick VCs that offer the highest valuation; instead, they pick VCs that offer something extra, whether it be strategic advice, people/hiring support or the ability to structure future rounds.

#2 Do they believe in you and the vision you are trying to create?

Despite knowing that Cristiano Ronaldo wanted to join Real Madrid in 2007, Ferguson persuaded Cristiano Ronaldo to spend another season with Manchester United.  Ferguson assured Ronaldo that by staying for one more season, he would earn more as a player and build his reputation as a match winner.  Following the advice of his coach, in his final year at Manchester United, Ronaldo earned his Ballon d’Or and FIFA world player of the year and eventually joined Real Madrid for a world record transfer fee at that time. Ronaldo and Ferguson believed in each other and showed mutual respect that led to wins for both parties.  Just as Ferguson and Ronaldo developed a strong mutual relationship, do your potential VC partners show signs that they will be with you for the long haul?

Questions to ask yourself

• When things get hard – will they pick up your call at midnight? Do other entrepreneurs in your circle say they are people you can count on as trusted advisors?
• Are they able to openly talk about your strengths and weaknesses to help you improve and achieve your vision?
• Have they enabled other founders to see around corners and do even more than they thought was possible?

 #3  Do you understand how they work with founders?

The VC model has evolved in the past 20 years. Some VCs are using data alone to make investments, others take a much longer approach almost mirroring how PE firms diligence a company.  It usually takes founders 83 days before they receive a funding decision from a VC, but some well established firms are starting to give decisions within 2-4 weeks.^[2] These VC firms want to be known for moving quickly and are willing to offer founders premiums on their existing round and not take up board seats.  Other VCs like to be more involved, whether taking an active role on the board or offering their portfolio companies access to a suite of value-add services on a rolling basis. In a similar way, B Capital’s partnership with BCG not only helps us with pre-investment due diligence, but also post investment case work and gives our portfolio companies access to a wide network of experts globally to help them grow.

Questions to ask yourself

• How do your VC partners operate – will you have a SPOC or representative or do you need to navigate through their internal structure?
• Do they come prepared?  Great investors develop a track record and are known for bringing something unique to the table every time – this might be providing capital and getting out of the way; offering targeted help such as guiding new market expansion or providing introductions to grow the sales pipeline.
• How quickly will they turn things around – are they capacity constrained or do they have the ability to ramp up engagement when you need it?
• How long will your VC stay with you? Most VC firms operate on a 7–10-year cycle but some firms are starting to offer patient capital to ensure founders can make a lasting impact on the world.^[3]

#4  What do your peers say about them?

Customer reviews rarely lie – are your potential VCs trustworthy and transparent?  If a VC comes recommended by another top-tier founder, there is no more powerful endorsement.  It signals they will always make room for them on the cap table.  We recently conducted a founder series with some of our portfolio companies to understand what makes a good partner, and something that stayed with us was the ability to discuss not only investment and operational topics but the ability to coach them and their leadership team through sticky situations.  While a VC needs people with deep subject matter expertise, like any good soccer club, they also need additional forms of support (e.g a strong platform and operations team) to step in and help portfolio companies operate at their best.  For example, the ability of VCs to support and guide during a period like COVID separated the nice to have vs must have VCs on one’s cap table.

Questions to ask yourself

• Do they care about you and your team – how much time have they spent with you personally?
• Do other founders like working with them?  If yes, why?
• Do they have a network that you’d want to be part of and have access to?
• What can they do to help you and your leadership team move to the next level?

One final tip: allocate enough time to do your homework and make an informed decision.

The due diligence process is a two-way street. VCs expect our founders to have vision, expertise, and a plan.  Founders are now expecting this from VCs too. The investment partners I work with handle 5-10 investments at any point in time, and their secret to scaling impact is knowing what they can bring to the table – and hiring well for what they can’t. It takes time to develop this system, but once created, they build lasting relationships with the founders they work with.

Footnotes:

[1] B Capital Internal Research

[2] https://hbr.org/2021/03/how-venture-capitalists-make-decisions

[3] https://medium.com/sequoia-capital/the-sequoia-fund-patient-capital-for-building-enduring-companies-9ed7bcd6c7da