It's natural to be excited when an investor shows interest in your fundraise, but it's important you do your due diligence before signing a term sheet. 

These questions should serve as a useful starting point to ensure you know who you are about to enter a 10 year+ relationship with. 

Questions to ask

1.How many investments have you made in the past 12 months?

Reason for asking

Checking that the fund is active in the market to avoid the situation where the fund doesn’t have capital to deploy (yes, unfortunately, this does happen!)

2.How big is the fund you are currently investing from?

Reason for asking

Understanding if the cheque they are writing into your company is meaningful – a £1m cheque from a £50m fund = 2% (meaningful); same cheque from a £1bn fund = 0.1% (not meaningful)

3.What vintage is the fund you are currently investing from?

Reason for asking

Knowing how long you have until the investor needs an exit – funds typically have a life of 10-12 years (with some allowing extensions) – if they deploy in, say, year 3, then you have 7-9 years

4.What vintage is the fund you are currently investing from?

Reason for asking

Knowing how long you have until the investor needs an exit – funds typically have a life of 10-12 years (with some allowing extensions) – if they deploy in, say, year 3, then you have 7-9 years

5.What % of the fund do your reserve for follow-on?

Reason for asking

Will the fund support you in subsequent rounds? If no, you’ll need to run another full fundraising process for your next round and there is risk of a negative signal from their non-participation

5.If the fund doesn’t follow-on: how do you support your founders during the next funding round?

Reason for asking

Will the fund be able to help you prepare for an externally led funding round by reviewing decks, helping with investor introductions, etc.

6.If the fund does follow-on: how do they decide how much capital to deploy into each company?

Reason for asking

Understanding in advance what to expect from the fund – ideally you want to secure a minimum of pro rata to send a positive signal to new investors

7.How do you add value beyond capital?

Reason for asking

An open ended question to see how the fund believes it can support you aside from providing capital

8.If the answer is vague to the question above: can you give me 3 recent examples of where you’ve supported your founders?

Reason for asking

9.Ensuring you have a clear understanding of exactly what support you can expect and giving you examples to validate with references.

10.Please can you introduce me to 3 founders to take references?

Reason for asking

You should take extensive references before signing a term sheet, starting with the founders the fund offers to introduce you to.

This article was originally published on Playfair VC by Chris Smith by and has been sourced here for educational purposes