Posted on July 14, 2010
Filed Under Entrepreneurship |
If I pitch a VC and they don’t ask any good tough questions, I’m not sure I want to take their money.
Let me say that again. If I pitch a VC and they don’t ask any good tough questions, I’m not sure I want to take their money. I bring this up because the more fundraising I do, and the more questions I get asked by entrepreneurs who are trying to raise money unsuccessfully, the more I realize that they are looking at this all wrong.
Hard questions are a perfect example of something entrepreneurs don’t like. People complain to me regularly about an investor who asked this or that, and how bad it was. But really, you want hard questions, for a few different reasons.
1. You can tell a lot about a person from a hard question
If someone asks a hard question mainly because they want to be a jackass, you don’t want that person on your board, so now you get to rule them out. You can usually see these questions because they have some complicated issue that any investor who really understands where you are would know is irrelevant at this stage.
If it’s a good hard question, it tells you a lot about where that VC sees the risk in the business. And THAT IS A GOOD THING. Do they see market risk or technology risk? Are they concerned you can’t become big enough to justify VC $$$, or are they concerned you are going to miss the boat?
Overall, a hard question lets you evaluate the asker. It shows the perspective and experience they bring to the idea, and it can often reveal how well they understand the market you are in. You don’t want someone who asks hard questions just for the sake of asking hard questions, but you want someone who shows that they understand your space and they aren’t afraid of the hard issues.
2. It’s good to get the hard stuff out on the table.
You don’t have to know all the answers. If all the answers were known, some slow ass Fortune 500 firm would be doing what you are doing. By getting the issues out on the table, you can see if you and the VC agree on the main risks in the business and can focus on mitigating them early. Risk doesn’t scare good VCs. Their whole business model is to place risky bets on risks they think they can beat. What scares them is when you aren’t acknowledging the risks you need to address.
3. Hard questions will push you.
If you are going to do a startup, you will be pushed on from all sides, in all kinds of ways. If a hard question gets you out of kilter, maybe you aren’t cut out for it. If someone joins your board and then doesn’t challenge you when things are going poorly, that isn’t good for you or the company. You want the hard questions. By making you uncomfortable, they force you to search for solutions.
In general, the lemming like behavior VCs display is shocking if you haven’t been part of the VC world before. That’s why you need to avoid so many VC firms, and why they have a bad reputation. You don’t want lemmings. You want independent minded people, the people not afraid to ask hard questions.
When Backupify raised our last round, part of what I liked about both the firms that invested (First Round and General Catalyst) is that they both came to us independently, and neither cared about who else was in the deal. They were both willing to pull the trigger and make an investment without another firm being invested. And yes, they both asked a few hard questions.
And that is what you want. You really do get married to your VCs in some ways, and while most of the time things will be good and you will have a lot of fun, you want someone who cares enough to ask the tough questions when things are going badly.
So if you pitch a VC and you get some hard questions, don’t get mad. In most cases it is probably a good sign.