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How to Do Research on VCs (Written by a VC)

Lee Hower
March 12, 2015 · 3  min.

In a typical first meeting between a VC and team of co-founders, the investor typically ends up asking more questions than the founders. Here at NextView, we (like all good VCs) encourage founders to ask questions they may have of us, but it’s just the nature of the interaction: We spend the majority of the time talking about the founders’ startup, not the VC firm.

So how can entrepreneurs do research on us VCs?

Here are four key areas to consider. We’ll start with a couple that are obvious but worth stating before discussing two fewer-used tactics that are arguably much more telling.

1. Consult the Interwebs

Most venture firms list their portfolio on their website (here’s ours) and sometimes talk about their typical investment model (ditto). Yes, sometimes these are generalities about how we back talented entrepreneurs building great companies, but taking a look at a VC’s portfolio can tell you a lot about the types of companies in which they invest.

Nowadays there are other options for online research too. For example, there is frequently information about a VC firm on sites like CrunchBase and AngelList. These and other sites amalgamate data from SEC filings, press articles, and self-reported info, and they can help entrepreneurs understand not just what companies a VC invested in but at which round/stage.

And of course, many individual VCs blog or have social media presences, so you can get a sense of what a particular partner is interested in or what themes they’ve concentrated on.

The web tends to be the best (and most obvious) source of research early in the process, e.g., when you’re deciding which VC firms to approach or trying to learn the basics about a firm prior to a first meeting.

2. Talk to Your Startup Friends

This almost goes without saying, but odds are good that your other founder friends in the startup ecosystem have crossed paths with some of the VC firms you might be researching. Even if a VC passed on Startup X (or Startup X turned down that VC’s term sheet), getting intel from folks who have directly interacted with a particular firm can be very useful. Just keep in mind that for any given firm there are hundreds of VC/startup interactions in a given year. Data doesn’t lie and reputations, good or bad, exist for a reason, but you should still try to gather multiple data points for comparison whenever possible.

3. Ask Us (and Be Direct)

The best way to better understand a firm is to simply ask them questions which might be on your mind. It’s usually towards the end of the meeting, but to pretty much every entrepreneur I meet, I suggest they ask anything which might be on their mind pertaining to NextView or me.

Speaking personally as an investor and partner at NextView, I’m more than willing to answer any questions that an entrepreneur might raise. But it’s worth noting the danger in paying lip service — some folks ask questions which they think they should ask by some external standard, which in my humble opinion aren’t super relevant. For example, occasionally entrepreneurs will ask things like, “How much capital have you called from your current fund?” or “Who are your LPs?”

These are fair questions, and whenever asked, I answer them directly. But at best they’re really an indirect way of getting to information about which an entrepreneur actually cares, while at worst, they may come off as an “almost-but-not-quite sophisticated” buyer.

For example, when an entrepreneur asks about capital calls, what they really care about is, “Are you guys still actively making new investments at present?” If that’s what you want to know, just ask that. It’s far more dispositive to learn how many new investments a VC firm has made in the prior quarter/year (or how many more they intend to make out of their current fund) compared with learning whether that firm has called 20% or 40% or 60% of their fund.

4. Do Reference Calls

This step is usually at the very end of a process, when you have a term sheet from a VC firm and are deciding whether you want to proceed. Similar to a job interview, these aren’t typically done near the beginning of the process.

We tell entrepreneurs that we’ll take the “Pepsi Challenge” any day and that they should talk with any founders in which we’ve ever invested. Practically speaking, that’s of course not possible — we’ve invested in over 40 companies since NextView started in 2010. But when we get to the “bottom of the funnel” of a fundraising process, we’re more than happy to have entrepreneurs talk with two or three founders in our portfolio, and we will gladly put them in touch if they don’t know these folks already.

A Welcome Level of Transparency 

In decades past, VC firms were far less public about their activities and the entire process of interacting with and raising capital from VCs was pretty opaque. But today you can research us pretty well throughout the fundraising dialogue.

In closing: Do your homework; dedicate meaningful time to discussing the firm, not just your business; ask direct questions; and when in doubt, nothing beats the unfiltered take of your fellow entrepreneurs.


Author
Lee Hower
Partner

Lee is a co-founder and Partner at NextView Ventures. He has spent his entire career as an entrepreneur and investor in early-stage software and internet startups.