The Startup Savant podcast series is about the stories behind startups, the founders who run them, and the problems they are solving. Hosts Ethan and Annaka were joined by Jules Miller, a partner at Mindset Ventures, an early-stage venture capital (VC) firm and former founder. Miller is an entrepreneur turned venture capitalist, so she’s able to bring a balanced perspective to the capital raising process. She shared her insider’s view of the industry and talked about who should (and shouldn’t) be raising venture capital, what her firm looks for in startups, and common mistakes founders make when pitching investors.
Why Asking Questions Matters
Miller talked at length about how important it was for founders to ask questions. She sees it as a way to develop a relationship with a founder. The entrepreneur that only talks about their business is missing an opportunity to connect with investors. Healthy relationships are built on mutuality, she opines. The entrepreneur that asks nothing of the VC is showing no interest in the VC. And if you’re not interested in the VC or just interested in its money, why should the VC be interested in you?
Moreover, you can tell as much about a person by the questions they ask as by their statements.
“If this is a one-sided conversation, it’s not a good conversation. Meaning if they’re only talking about their business and themselves and what they’re doing, then you’re not getting the information you need.”
For the VC, getting to know the management team is pivotal to accepting or walking away from a deal. There are two crucial things that matter in the startup world, says Miller. They are people and growth. A lot depends on the growth trajectory, but it is equally important to have a competent team.
The VC-entrepreneur relationship is not an arm’s-length one. By injecting cash, the VC takes up an equity position in the startup, i.e. the VC becomes part owner of the business. Thus, the relationship is anything but transactional. It could be one that will last for as long as 10 years, and so the fit between VC and management team must be comfortable.
Getting the right fit means founders should ask as many questions as the VC firm. They should, for example, ask about the size of the fund, what type of investment is of interest to it, what is its thesis, and what’s the typical size of its commitments.
1. Fund Cycle
Knowing where they will be in the funding cycle is also useful information for the entrepreneur, says Miller.
“Founders can and should be asking investors more about their fund, more about the check size, more about where they’re in their fund cycle. Because all these things are important to figure out the fit.”
Fund cycles typically terminate after ten years. At that point, the fund will be looking to return capital to investors. Inevitably, performance pressure increases as the fund nears that point.
2. The Funding Process
Miller stressed the need for founders to understand the process, as well. “I think the other thing that founders don’t ask nearly enough is about process. Right? How long does it take for you to make an investment? What’s the next step? What can I expect if we get to the end with you of this process? How long does that typically take?”
On average, VC deals take two to three months to close. Exits tend to be either a sale to a large corporate buyer or an offering of securities on the public markets. Less desirable are secondary sales to other funds.
Regardless of their initial point of contact, founders should aim to connect with a partner as quickly as possible. Ultimately, it’s the partners who can make or break a deal.
3. Check Size
“What’s your check size? Do you lead or follow?”
Check size — the amount invested in a portfolio company—will depend on the size of the fund. A VC firm will not want to invest more than 10% of its “dry powder” in any one company. By comparison, banks are prohibited by the FDIC from lending more than 15% of their capital to one borrower.
One important consideration is whether the fund will be a lead investor or a “follower.” The lead investor is the investor who, together with the founders, sets the deal terms, performs due diligence, and supervises the entire process. The lead investor would likely be the largest investor and have a seat on the board. Followers, usually the limited partners, are the other investors who contribute to the fund but generally take a back seat to the process.
4. References
As in all relationships, it’s a good idea to find out as much as possible about the other party.
“If it looks like the investor is very likely to make an investment or to offer to make an investment, ask for two or three other CEOs that they have invested in the past, where they have a relationship, it doesn’t matter.”
Since VC investments are equity contracts, the risks are even greater than debt contracts that provide avenues of recourse. Accordingly, mitigating investment risk by due diligence is of vital importance. Part of the due diligence process is checking references provided by the entrepreneur. But, says Miller, this is likely to be supplemented by reaching out to others who know the founders. These steps to obtain third-party assessments underline the emphasis VC firms place on getting to know the startup team. In the VC world, the startup team matters.
Final Thoughts
The episode featured venture capitalist Jules Miller of Mindset Ventures, who reminded entrepreneurs how important it is to establish a relationship with investors. Founders should acquire the habit of asking questions about the funds they’re working with, she advises. Connect with investors through regular dialogue. Find out more about the fund, its decision-making processes, and whether or not it’s a good fit with your startup. It’s a long, long way from investment to exit; better to have a partner that makes the journey easier.
You can find this episode of the Startup Savant podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts.
