Choosing a partner is often a "one-way street."

Written by: Alana Levin, Partner at Variant

Translated by: Luffy, Foresight News

Just as VCs conduct due diligence on investment projects, founders should also conduct due diligence on potential investors.

The primary task of a VC is to increase the chances of a company's success. VCs can achieve this in various ways, and determining how each investor can effectively support their startup should be at the core of a founder's due diligence. If I were in the founder's position, I would filter VCs based on the following criteria.

First, can the VC really improve the project's chances of success?

Can investors provide other value beyond just pure funding?

I believe they can. Through communication with founders, here are some of the most commonly mentioned ways VCs can genuinely provide help.

Brand: Gaining support from "top-tier" venture capital firms typically (at least in the short term) enhances the company's brand. This provides direct assistance in talent recruitment. The brand halo effect is somewhat less impactful when hiring the initial 10 employees, but it becomes crucial for attracting talent once the company reaches the Series A funding stage or beyond. Given that early hires have a significant influence on the company's trajectory and culture, the ideal approach for founders is to attract these talents from their own network.

A strong brand means that the firm or partner is well-known, highly respected, and seen as an important factor in the project's success. Success is the best brand.

Knowledge and Insights: Do investors have relevant experiences to draw from that can provide useful advice to entrepreneurs? Are they particularly skilled at identifying factors that impact the market or business?

This actually encompasses two points: first, the relevant experiences that VCs may have accumulated from successful companies in their portfolio (or similar experiences as founders themselves); second, their ability to provide clear insights into broader market dynamics and how these dynamics may impact the company in the next 6 to 12 months.

Network: Sometimes VCs can help founders (or other functional leaders) connect with the right people. "The right people" may include other executives with relevant experience or potential customers. Founders still need to fight for business on their own; very few customers are acquired solely due to the influence of a VC. However, investors can certainly help entrepreneurs at least open some doors they want to enter.

Promotion Channels: Some VCs have audiences, so becoming a "KOL" is part of the value they provide. This is evident today: many VCs are trying to establish their own promotional channels through podcasts, newsletters, X accounts, etc. Sometimes, these channels can indeed become effective means of increasing visibility and driving traffic for new startups.

You’ve received investment offers, what should you do next?

First, congratulations! Having the opportunity to choose from a range of competitive investment offers is both an achievement and a privilege. Take some time to enjoy the process.

You likely already have some intuitive judgments about whom you want to partner with. The due diligence process often reveals certain situations, such as the types of questions people ask, the insights they share throughout the process, their responsiveness in follow-ups, and whether there is a cultural fit, etc.

It’s time to validate that intuition. Here’s the process I would follow, in no particular order:

Conduct background checks on investors: These checks should cover successful companies in the VC's portfolio, as well as those that are struggling or have already failed. Understanding how investors behave as partners in both successful and stressful situations is crucial. Ideally, these references are companies that have also worked with the potential investors you are considering.

Check for conflict risks: Does the firm have a history of investing in competing companies? More importantly, have they invested in any companies that could theoretically compete with yours?

Consider the partner's tenure at the firm: Typically, you are choosing both a firm and an individual partner. I encourage more founders to ask potential partners about their ambitions and future plans. A relevant thought experiment is to ask yourself: if this partner were to leave tomorrow, would you still be interested in this firm?

Determine if the firm matches the stage of your company: Whether a fund continues to invest in companies at the same stage as yours will affect the usefulness of its resources, the degree to which your company is prioritized in resource allocation, and the relevance of the advice the investor can provide. A $1 billion fund providing a $5 million seed round investment represents only 0.5% of its total allocation. Frankly, if a fund invests $50 million to $100 million in later-stage companies, it becomes more challenging for earlier-stage companies to gain attention and support from the firm internally.

Understand the firm's views on exits: This may sound a bit strange. However, in an era where IPOs are becoming increasingly rare, understanding investors' views on acquisitions or selling secondary shares can help you avoid many troubles down the line. Similarly, in the cryptocurrency space, understanding investors' views on token sales is a useful reference for token design and launch strategies.

Choosing a partner is often a "one-way street." Selecting the right VC can never "make" a company, but it can increase the chances of success and at least make the founder's journey a bit easier. Spending a few extra days conducting due diligence on potential investors may pay off in the long run.

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