Dispatches has a post titled "10 questions to ask a VC" that is actually some comments on the original list. I thought it was a pretty good set of question, so I'm going to give it a spin:
How big is your fund?
There is no point trying to raise $1 million from a $1 billion fund.
Answers could range from "none of your business" to "big enough"... just kidding. Seriously, we have a hybrid structure that recognizes the fact that we are a publicly traded company, but also accomodates the longer term view to value creation in the VC business. So in short, we are an evergreen fund but periodically go back to the Supervisory Board (German equivalent of Board of Directors) to "raise" a new fund.
How much is left in the fund after commitments and reserves for follow-ons are accounted for?
Is there enough "dry powder" in the fund to support your company's needs over time?
Enough, because we allocate follow on investment needs into our planning, but also because I don't have the rigidity that a "normal" venture fund has with regard to fund organization. I can shuffle monies around if the need arises.
When do you intend to go out fundraising?
In other words, are you going to disappear for six to 12 months immediately after making an investment in my company and joining my board of directors?
Probably do something the end of next year, but who knows what the deal pipeline will bring us.
When you fundraise and tell the story of your three most successful investments, how will you describe how value was created for LPs?
The answer to this question will give you some insight regarding how you might be expected to create value. For example, if the firm's biggest success came as a result of increasing valuation multiples through the consolidation of a fragmented industry, your company's strategy of creating value through innovation and organic growth might not be a great fit.
Listen, any VC who says "we're gonna do this, this, and this for our investments" is talking out of their ass. Every investment is different and the requirement is to build a strong relationship with management in order to know what the needs are at any given point in time. If a VC has a strong relationship with management, and can deliver good results in recruiting, strategy, relationship facilitation, and fundraising, when the investment has requirements for any of the above, then that's a good thing. What I don't necessarily understand is the question about value for LPs... you are either making them through doing good investments, or you are not. It's pretty binary.
Who is on your firm's investment committee?
Depending on the firm, your primary contact may not be among the small group of founding partners who may be making key investment decisions.
2 of our Executive Board members, but that's only after the deal has been approved by our partnership.
What was your firm's advertised IRR when you raised your last fund?
If the firm raised its most recent fund based on an advertised trackrecord of, say, a 60% internal rate of return, you might want to question whether your plan's forecast of, for instance, a 30% IRR is really going to maintain your investor's interest over time.
we don't disclose it and even if I did I'm not sure it's very meaningful. The problem with IRR in the private equity world is that you can do the IRR calc on a specific investment and come up with 5 different answers... and they would all be correct.
May I get a copy of the "book" you sent around when you raised this fund?
What promises did the general partners make to their limited partners when they raised their last fund? How might those promises impact the fund's relationship with your company?
What do you think the exit will be on this investment? Do you think it will be a financial buyer or a strategic buyer?
You are going to be asked this question. It's only appropriate that you find out up front what the expectations of your investors are regarding this critical issue.
There are 4 possible outcomes, 1) you go out of business and lose all my money, 2) you get acquired by someone, 3) you go public, 4) this becomes a nice little business that is run for cash flow. Obviously #1 is bad, but #4 is bad as well because the only way I'm gonna get my money back is through #2 or #3. Can I predict when #2 or #3 will happen? No. Will either happen if you are executing on your business plan and become an opportunity or threat to other companies (for #3 specifically)? Yes. If it's an A round deal, well then you have more than a couple of years to figure it out, but if you are raising your EEE round of funding, then you better have a good answer for me about how you will achieve #2 or #3 pretty damn quick!
As you think about how to shape the company so that it is optimally positioned for that exit, what three things do you think need to be done in my company?
The general partners are measured against their ability to deliver value to their investors. By what metrics will you be judged?
Can't answer this one without knowing the specific company. However I will say that investors shouldn't be afraid to say "well I think your management team needs to be upgraded" if that is in fact the case. It's better to just put it out there and not dance around it. Entrepreneurs usually gut feel when they need to be upgraded and respond well to a plan that details how to do it.
What was your firm's biggest disaster as an investor? How did the investment go sideways?
There is a difference between a bad result and a bad investment. Does the investor know the difference? How did they behave?
I think it's fair to say that every bad investment is rooted in a sense that something will happen to turn it around and out of that hope we fabricate a reality to support it. Hope is not a business strategy. The best bad investment I was ever in was when the investor syndicate out of the blue said "hey this thing just isn't going to scale, let's shut it down now and return the money". We did, and we were right to do it rather than letting the company slowly burn away all of the cash.