Investors and entrepreneurs started 2022 bright-eyed and optimistic as startups raised nearly $13 billion in the first quarter, making it the fifth-highest quarter for funding ever.
Lately, however, there has been increasing talk of a downturn in global venture capital. Clearly, money isn’t flowing as freely as it used to, and that’s changed the landscape for ambitious startups looking to build and scale their propositions.
However, a challenging economic climate does not necessarily mean that startups have to accept the first offer, settle for lower valuations, or attract investors who have different values and ambitions for the company. It is now more important than ever that each party comes to the negotiating table with clear questions and expectations.
Here are three firm but fair questions founders should consider asking their potential investors:
What value can you offer besides money?
It’s important to remember that VCs don’t have an endless pot of money – they’re at the mercy of the liquidity of their LPs.
Most investors who get their money’s worth will demonstrate that they come with more than just deep pockets – value such as industry expertise, business experience or a global network. Founders should be sure to proactively ask what an investor has to offer, especially the networks and introductions that potential investors can facilitate.
There is a significant difference between an introduction facilitated through an email and a clear handover to someone whose relationship with the investor is deep and based on many levels of trust. Many investors pride themselves on having a robust and lucrative contact list, but not all introductions are the same – a LinkedIn profile rarely showcases the depth and quality of an investor’s network or knowledge.
My advice is to be clear about your commercial goals and get potential investors to offer names of individuals or organizations that will have the impact you’re looking for. For example, we recently launched one of our portfolio companies with an $80 billion infrastructure company, with whom we had built deep relationships to build pilots in a number of regions.
Introductions shouldn’t just forge connections; they must have a tangible commercial impact.
How safe is your money?
It always amazes me how many founders believe VCs sit on piles of cash that they are about to hand out.
It’s important to remember that VCs don’t have an endless pot of money – they’re at the mercy of the liquidity of their LPs. It is therefore wise (and necessary) to have answers to three key questions: