What Questions Should Founders Ask VCs? Insights from Jon Bradshaw and Peter Harris

Welcome to the Venture Capital podcast. Go to www.vc.fm if you have questions. Today we are going to talk about what Questions founders ask VCs, and my guess is probably the same questions everyone always asks, right or no. Are there any ones?

I don't think it's like, what do they ask? Is what should they ask?

Oh, what should they ask?

What should they ask?

They should ask nothing, pack up and leave.

They should just be like, please give me money, thank you, and then go.

What questions should they ask?

No, no. In your experience, what, you know, what, what questions have you seen what kinds of things came to light after a founder took money that ended up being like, pretty critical that they should have known about or would have been really helpful to know about before they did that deal?

From my experiences on deals that I've done, and mine's probably different, I think a lot of deals go south. A lot of startup deals go south.

Yeah.

I think there are things that people say that aren't in the docs and those terms can come back and haunt you for years.

What do you mean by that?

One of the deals I had had a liquidation anti dilution right in it. And in my mind I knew it was an aggressive deal. An aggressive term.

Yeah.

Should have known better. But at the time, the group that we did it with, I figured, hey, they're my friends. If I need to change, I can always change. And then we realize when, once the game's in play, that what people say versus what's in the contract is a very different thing.

So people don't really read or understand the contracts. They just go off of what people say?

No, I think I understood what was in the contract. And you expected, like, you think the best. And when people are in negotiations, they don't think the best, they think about them.

Right, right, right. So it's kind of like the interpretation of the contract.

So the things I've been impressed with lately is some of the founders that have raised locally have told me they've come and talked to you and they said they got better advice from you than some of VC friends.

Wow, that's very flattering. I don't know why they felt that way.

And I don't, I don't know the specifics. I was riding with this founder in their car and they said, you talked about a better way to structure the deal. And when he went to his vc, the VC agreed and said yes. And he's like, then what? What are you telling me about? Right. But I think a lot of those are very circumstantial. And this in this case that person also had acquired a business.

Yep, I know who you're talking about.

Yeah, there we go. Maybe you can talk more about it without the background. But anyways.

No, but I mean I think, I think all of this gets to this point of like, I don't know really like figuring out who the VC is as a person. Right. I don't know about you, but I feel like there's like a lot of like two facedness in the venture community where like when things are going well, like every VC wants to be your friend and they think you're like super cool and they are like also like the first to kind of like trash you when things don't go well as a founder. And so like teasing out like the integrity of a vc I think is, is really important, you know, and like, I don't know. So some of the things that I like question wise is tell me about some deals that failed and how did your firm respond? How do you think about failure since failure happens the majority of the time in your portfolio? It happens in every portfolio. Right.

But if you ask that question, they're not going to find you.

No, they may not. Right. It depends on how hot your startup is. If it's super hot, they will. Because the cardinal sin and venture is not doing a deal that loses money. It's not doing the deal that makes a ton of money. Right. That's what kills your career. So yeah.

There's five deals in Utah every year that matter. Maybe five.

Yeah.

And if you're not on those five and there's 30 other VCs and if the next time those VCs go to raise, if you're not in the majority of those deals, they'll just go to the fund who was. Right.

Right.

So it's the same cost, 2 and 20.

Yep.

It's all the same. Just pick the. Pick the person or the firm who can pick the winner.

Yep. So look, I think you can ask hard questions of vcs. VCS can ask hard questions of foundries. I don't know why it can't be the other way around.

I feel like when you ask hard. So here's the secret. When you start asking VCs hard questions.

Yeah.

No one else does. And it's like nagging. Have you heard of the frame negging when it comes to the dating world?

No. Talk to me about.

So there's a book, it's I think it was like the Secret life of a Pickup Artist. I read It. When I was in college.

Yep.

And one of the stories in there is he says he was at a bar, he went and talked to a girl, and he says, you say something that's like, that's supposed to be cute, but they don't know if it's cute or upsetting. And he said, he's like, hey, your teeth remind me of Bugs Bunny.

Yeah.

And so the point is, it throws their game. Everyone's always, you know, they're the. The pretty girl in the room is used to being, you know, sought after. Same with the VCs. Sure. And when you start pushing back, but you're not pushing back, like, hey, you're wrong, because every founder does that too.

Yeah.

But asking them the questions like, hey, why if. Why should I take your money? It changes the game. It does. I think if I were to raise it again, I'd probably first think I would. I would do is I'd say, why should I pick you over this? Another firm that we're talking to.

Yeah. I mean, it does. It does create a little bit of fomo. I will say, though, you have to. You do have to walk a line, which is. I've also been with founders that are, like, super aggressive on that kind of stuff, and I'm like, you know, I don't know that I really want to work with this person. Right. Like, it's like, I am happy to, like, talk through, you know, challenging things and answer hard questions, but if somebody's just like, yeah, why do you deserve to breathe the same air I do? I'm just kind of like, eh, I'm kind of over that. So I think, yes, ask hard questions. Just be mindful on how you do it. Instead of saying, like, I probably wouldn't say, like, why should I take your money? Instead of, like, five other firms, blah, blah, blah. It'd probably be more along the lines of, like, hey, talk to me about how your firm adds value. Talk to me about what. How you react when things go poorly. Talk to me about, like, how. What's your philosophy around valuation and terms? Right. There's a lot of these other questions that you can ask that can get to the meat of what you really want to know without being offensive.

Mm. And by the time you ask, you ask those questions, then your. Your time's up.

I mean, this is later on. Yeah. You're not asking these questions on day one.

Wait, how long is my NDA? How long do NDAs last for? Seven years?

I don't know. It depends on the NDA. Usually, like, two to three years.

Two to three years. Not sure if I can share, but one of the deals I sabotaged, I said, I want to ask the person's background. And the co founder threw a temper tantrum. They're like, you're trying to blow up my deal. I said, no, anyone who's going to put money in the company, we should find out who they're investing and we should find out who this person is. Because it like, seemed like the, it seemed like the investor wanted to play the, like, me and my other founder off of each other.

Yeah.

And to me, that seems like a toxic. Is toxic behavior.

Yeah, well, I mean, that's like, that behavior is just a red flag. Right. Anyways, because it's like, like, oh, well, if you're freaking out about that, maybe there's, you know, when there's smoke, there's fire and bigger issues. Um, I read this article recently and they talked about this question of, like, what. What questions should you be asking a vc? And one of the things that I thought was an interesting question they were asking, I don't know that I agree. So I'd be curious on your thoughts. But they were saying that if you ask a venture investor what their performance is, they will tell you how many IPOs they've had. Specifically, if you ask them, like, what's your failure rate? They won't know. They'll just be able to tell you like, we, we had a bunch of wins. And they were making the argument like, that's a, that's an important question to ask because it gives you insight into how, how the vc, how, how well the VC knows their business and how they think about risk and, you know, are they. Are you just like one of a handful of companies and they just need one to hit? And once one of those starts to hit, they could care less about the rest.

Is that every fund, though, they want two or three to hit?

Well, every fund does. But there's different philosophies on how you respond to the losers.

Right.

In the portfolio. Like, you know one of my favorite VCs out there? Well, there's two. Two great VCs, but one of them is Brad Feld, and he talks about how, as a vc, like, a good VC will spend more time and energy helping the losers in their portfolio. Like the companies that are going to end up losing the money or just kind of break even than they do on the winners. And you would think it'd be the other way around. You'd think, like, the VC would spend most of the Time with the winners and no, you know, very little time with the companies that aren't going to make it. He's like, good VCs spend the time with, with the struggling companies because it signals very strongly to other founders that you're the kind of person that rolls up their sleeves and the times get tough.

Okay.

But I think a lot of VCs and founders don't realize this until it's too late. Actually take the opposite approach, which is I'm gonna make place a bunch of bets. I am right there with you. As long as things are going well and as soon as they aren't like I'm done, I'm out. You know, my checkbook is closed, my network is closed to you. You're a liability, you're not an asset. And all my time and energy is on my winners. Right. Because I want to claim as much, you know, recognition for those winners as I possibly can.

Okay. Can we talk about. Should we, can we. Do we want to go on the record and talk about feuding VCs in comparison to this and. No.

If you want.

Do you want to.

Sure.

Wait, you sure? Is that a. Sure. So let's talk about, let's talk about.

It and we can edit it out later.

Let's talk about VC strategy. So some, some. There are some VCs in Utah who are super, super founder friendly.

But.

And There are other VC and there are other VCs in Utah and that I know in South America and in San Francisco who are. We are so hyper focused. Our website is literally just our logo and a splash page.

Yeah, yeah.

And you know who like you, you've got some ideas. We can talk about that and Well.

I mean Benchmark, go to Benchmark's website. It is literally like their logo and that's. It is like the ultimate like power.

Move which to me is the sender as a signal of where they're, they're hyper focused.

Sure.

And that focus is going to go through their entire fund. And if you're not one of the tops, you're good. But one of the. We're talking about like what questions to ask.

Yeah.

If a VC is helping their entire portfolio, it's great. But how much help can they really? Yeah, I don't think they're that helpful.

And look, I don't know that the responses. The VC like takes a part time job at the startup. Right.

I think, I mean the question I'd ask is how are you going to help me get to my next round and what intros can you help me make.

I think that's valuable.

That's the main thing that I think is beneficial. Do you invest in deals for the second time? What would it take to. For that. To what? What would that take for my company to make that happen? And if not, how do you help me to get my next deal? Right. Because if not, you're not like, that's the only. I think that's the biggest value that a VC adds.

Okay. That's fair. Yeah. I don't disagree and or exit.

Hey, we don't think you can win. So here's even the better one. We think you're not a winner. We're going to get you acquired.

Yeah. See, this is where I think, like it's more interesting to understand, not just like, tell me what your failure rate is. Because a fund could have a very high failure rate, but that doesn't mean that they're like going to be a jerk through that failure process. Right. I'm thinking about a fund that we both know well. Like they are hyper focused on driving really good returns and they're a seed fund. So they place a lot of bets. There are only a few of those that are going to win, but the ones that don't win, they spend a lot of time helping those founders get to a soft landing. They're not spending a ton of time running the company. Right. That's not their job. But they are very thoughtful in, you know, helping those founders like land at the next thing, land a soft landing, wind down the company in an orderly way and then, you know, support them on their next venture. Right. That sort of thing. I think there are a lot of ways to be supportive of founders without saying like, oh, we're just going to keep writing you checks because frankly, like, doesn't really help at the end of the day. Right. To just keep dribbling a little bit more and more money into these companies without getting them to some sort of landing. Right.

But I think the landing is, hey, we help you get to your next round. They do it themselves. They help you get your round eventually from someone else or they help you get acquired.

Yep.

Like that's the only value I see in a vc.

The only value. Oof.

Like the main thing I think, of what you're looking for. I want cash now.

I want cash in the future.

Cash in the future. And. Or an exit landing.

This thing.

Yeah, I mean that's the. I mean there's, I think because we had arguments about this over, I think.

There are ways in which VCs can add additional value, but I think that's fair. Like VCs can be helpful. Helpful with hiring and pro forma, some landing customers, some things like that. I think talking to a vc.

Recruiting?

Yeah, like recruiting. I think talking to a VC to understand the fundraising landscape is super important because, like sometimes I'll talk to founders and they're like, they're like, oh, VCs don't add any value. So I just don't even bother asking them. And it's like, no VCs do can add a lot of value. You just gotta be thoughtful about like the value they're gonna add and the expertise that they have. Like, if they come in and they're giving you like product advice, probably more harmful than helpful. But if they're telling you like your metrics aren't good enough to merit the valuation you're seeking, you should probably listen to them because this is what they do for a living. They've done like a hundred times the number of deals you'll do in your entire life. And so you just gotta be mindful about where you're taking advice from them and on what topics.

I mean, I think one big benefit would be how is a VC opening the Rolodex?

Right.

What intros? What are the last five intros they've made? Do they make intros? When I used to work with the Utah Angels, it was an early stage angel group.

Yeah.

I had a personal goal of getting two people hired at other companies, either startups or somewhere in the tech space every single month.

Yep. Now I think Rolodexes are, you know, super helpful. You know, another question that I've been thinking a lot would be an interesting one to ask VCs is tell me about like the last two or three deals you did and go into depth. I want to know, you know, how did you source the deal? What valuation did you pay? How much did you invest? Did you take a board seat? What were the terms? Like, what got you excited about the deal? Right. What were the dynamics, the elements that got you really excited? I think that can also give founders a lot of insight into.

I think most founders don't have this type of time with a vc. Well, you're assuming that they're all in this scenario. Hey, there's a high probability we're going to find you, then you can start asking questions.

Yes, that's true. But like it's all dating, Right? So you don't ask these questions on the first date. Right. It's like going into a first date and Being like, well, how many kids do you want to have? Right?

And you're like, hey, with the right person, that's the right question.

Well, and then I've been in conversations with entrepreneurs, and we did have that. We did have conversations that were hard. The first conversation, the last deal we did, I spent like three hours with the founder just a block away, and we talked about all kinds of things. Right. So, you know, it ebbs and flows. It depends. Sometimes you have just a short amount of time to, to give the, the VC a pitch, and you're just trying to get enough excitement to get to the next meeting. But you should probably just, as you, you know, probably shouldn't jump into bed in the dating side right away, you probably should approach it similarly in the VC landscape of, like, hey, even if we're moving quickly and we want to close in a relatively short time period, you should be spending time with this person because you're going to be tied to the hip with them for years, if not, you know, over a decade. And so I think it's helpful to at least get a good feel for who they are and start asking some of these pressing questions. I also think there's a lot of questions that you don't ask the vc. You ask the other founders that they backed. And I would talk to people that have been super successful, and I talk to people who have not been super successful that the VC has backed and get a feel for, like, their experiences working with that, that individual. How do they approach, like, the boardroom? Are they inquisitive? Do they push back? Do they hold you to a high standard?

What.

Or are they, like, kind of a pushover? Or do they come unprepared? Right. Or do they cause a fit in the boardroom? Right. I was talking to a founder this week, and he was talking about how he did this exact diligence on a fund that they were looking at, you know, maybe having invest. And he was like, yeah, we, you know, there was one partner who came back with glowing reviews, and there was another partner at the same firm who, you know, everybody said is a disaster and a train wreck. And he's like, I don't know. Like, I, I like the guy that we're probably going to get, but what happens if he gets hit by a bus and we end up with this other guy? Right? So I think having some, you know, doing kind of that diligence, both on the individual as well as on the firm level, can be super helpful and eye opening. And sometimes I think it's Better not to take, you know, bad money than it is to take and, you know, any money at all.

People don't realize it can block a deal.

It can block a deal. It can set you up for failure. Life is short. You know, if. And here, here's the other thing. Like, if you're having it, if you're struggling to raise money and you can't have hard conversations with your VC because they get flustered and embarrassed and upset or whatever it is, you probably, like, shouldn't take money from them. And if they're the only ones who are willing to give you money, you should probably reassess your idea and maybe, you know, go back to the trying board and find something else. Anyways, that's my opinion. Right. Other people may have different perspectives on that. Right. Maybe it's just, hey, you raise the money, you can. You just assume that all VCs are snakes. You keep them at arm's length and you just build and, you know, capital is capital. It all spends the same. So. Oh, depends what's attached to.

Just go back to the basics of what questions should you ask? I mean, I think it's. It's. It's when. When I've tried raising six months in advance, I start doing founder dating. Who's raised recently, who did they raise from? What went well, what didn't go well? And you have to. It's, you know, it's just. It's one of the things you have to do if. If you think fundraising has to be your cards.

Yep.

You do it six to 12 months before you need to do it.

Yep. No, I think that's super smart. And, like, some of the questions you're asking those founders. Right. Is like, how long does it take for them to make a decision and get you a term sheet? And, like, you know, because then it can give you a gauge of, like, is this venture fund just kind of stringing me along? Are they really interested? Right. Because you probably don't want to waste too much time on funds that just.

Aren'T really that interesting or spend a lot on legal to have them bail last minute.

Ugh. Yeah, that's the worst.

Which happens.

Totally happens.

What brought up this? What was the genesis MYOS question that made you want to talk about this topic? Was there something that's happened to you or you've seen recently?

Well, so, as you know, I'm working on this new podcast concept where I want to go and meet with VCs, as many as I possibly can and ask them all the questions that I think founders should ask, because to your point, most founders don't have time. They don't get that much time with the vc, especially in that first meeting. And there's all these questions that I think they should know about before going in. So they have a feel for who that VC is and whether or not they align well with the ethos of the. The founder and the entrepreneur.

Like, for example.

For example, like, another really good question is, how do you, as a venture fund make investment decisions? Right? Who. Who gets a say? Do you. Is it just you write the checks as the partner, or do you have to get approval from your other partners? Like, what. What does that process look like? And every venture fund has a slightly different process, and it can give you a lot of insight into, you know, how to navigate that process, how you're doing in the process, like, all of those things, if you can kind of peel back some of those layers. So that's the goal, is to provide more founders with this information because it's not found on websites. Most podcasts don't ask about these types of things. If they do, it's tangential, and they may cover one or two of those things. Right. Like, tell me about your strategy. Right. But I want to get into the brass tacks of, like, how do you source deals? What's your preferred way to source deals? Which that's why I like this question of, like, tell me about the last couple of deals you did. And let's go. Let's go deep, right? Let's talk about, like, how you sourced it, why you got excited, what kind of check you wrote into the company, what were the things that got you over the hump? Because every. You see so many deals, you say no so many times. So, like, there's a big barrier to get over. And by doing that, give founders really good insight into, like, hey, this VC really likes it if you can, like, paint a very compelling story, you know, in this way. Right. And this vc, by the way, like, they're on year five of their fund, and they're probably tapped out, but they're probably still taking the meeting with you even though they're, like, on the verge of becoming a zombie fund. And, like, who knows if you're going to be the last check or if they've already written that last check out of the fund. Right? So, like, just some of these details that I think and I hope will be really helpful to founders.

Okay, well, I'm excited.

Awesome.

When is it? When does the first one drop? Because you've already done your first interview, right?

I've done my first interview. Yeah. I'm hoping to do, like, around 15 interviews and then start dropping them.

Okay, sounds good.

Awesome.

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Are there questions that you, as a founder, have found to be really inside, insightful, and effective? Please share those so that those of our other listeners can learn from you. Thank you.

Thanks.