By Georges van Hoegaerden

Even though Venture Capital has produced no more than 10% IRR for the last 10 years and has lost the confidence of the public markets (lack of IPOs) and public companies (lack of M&A, except for a few "garage" sales), many entrepreneurs keep chasing the mighty dollar from VCs who will not let entrepreneurs challenge their merit, at all or ever.

Even the top VC brands appear not what they look like on the outside. What more evidence do entrepreneurs need that cash clearly is not king?

Hope is the current VC strategy

Entrepreneurs still dive head first into a thick, dark and in-transparent venture soup that predominantly relies on a strategy of hope (if you listen to the rhetoric of its lobbying organization, the NVCA). Hope for better external factors, improved financial markets and a hope that those markets will forget how they were fooled before. That many valuations had no value, and that many high-priced acquisitions did not work out nor pay off (Skype anyone?).

And even when financial markets forget, the fact remains that investor validation does not lead to customer validation. Instead, financial markets are derivatives of real marketplace constituents; dutifully paying customers. And therefor entrepreneurs better make sure they have an investor who has proven to drive a successful transition from idea to innovation themselves. An investor who has already crossed the chasm and knows that the trajectory of an investment may be a variable (and has the patience to ride it out financially), while the outcome is not. That macro-economically the innovation has merit, and the investment is just-in-time; not too early and not too late.

Attach Merit to Money

So why would you marry a person of whom you cannot verify merit? Do you as an entrepreneur really think that getting money from a rich investor makes you rich? And why would you spend more time with your company and listen to investor directions than with your spouse and not verify the merit of your investor with the same vigor?

Sure, not every investor's past may be squeaky clean, or be a natural progression to where they are today. And neither does it need to be, investing in early stage innovation is a risky business. But the merit of how they combined their passion with their actions is important to assess in order to worry less about their future behavior. The investor's passion, foresight, drive and success are crucial in conquering a myriad of adversity that will come the entrepreneur's way.

The Questions to Ask

Now, I understand that the chances of finding an investor that wants to listen to your proposition in the first place is not easy. And once an entrepreneur finally does find a willing VC, entrepreneurs are often ready to kneel down and accept whatever comes their way. But let me remind the entrepreneur: doing so means you are sitting in front of a sub-prime VC who has just knighted you a sub-prime entrepreneur. The outcome of that trajectory is very predictable - just look at the past.

A smart entrepreneur knows that the only way to become successful is to make customers happy, and that the method that they envisioned to get there is a method your investor can and wants to support.

Since the bottom is falling out of many VC firms, listening to the advice from a VC without verification of merit is therefor extremely foolish if not self-destructive. Here are a few starting questions entrepreneurs should ask a VC, and should get answers on without hesitation or a blink of the eye:

- Which fund are you thinking of making this investment out of?

It is important to discern that entrepreneurs get a verifiable answer that prevents them from talking and listening to one of the many "walking-dead" VC firms. I would not attach a lot of credence to opinions from "walking-dead" firms.

- What is the size of the fund?

This question leads to the ability of the VC to support the runway of the company. It can indicate how soon entrepreneurs need to be looking for syndication rounds with new investors and ensure the flexibility of the terms to make it attractive to do so efficiently.

- What is the vintage of that fund?

The importance behind this question is to understand in how much of a hurry VCs are. I have seen many companies being pushed to an early (low ball) exit to demonstrate to a Limited Partner (LP, the investor in VC) an acceptable fund return (to raise a new or stacked fund), rather than preserve the best outcome for the entrepreneur.

- How much of that fund is current invested, how much remains unallocated?

Not just fund size but the room left in the fund often determines the behavior of an investor. How much is unallocated and at what stage of the vintage can also determine the authenticity of answers given to previous questions as it pertains to their support for other companies.

- How much are you allocating for my company?

How much do you think you need to support your runway to profitability or exit. Can and will this investor support you monolithically (unlikely) or with how much fragmentation of syndicate rounds. Fragmentation of rounds is generally not desired as it consumes a lot of time to put together (fundraising) and to maintain (board meetings).

- What makes you the right General Partner for my company?

What in the past or his foresight makes this GP the ideal partner on the board. The merit of his performance will be an indication of how nervous the GP will become when the trajectory of your innovation appears different from the trajectory predicted at the outset. This GP's answers will elude if he can see the forest through the trees.

- What is the performance of the fund?

How well are the other companies in the VC fund doing? Is your company going to be their first expected win, do the GPs have a fund strategy that is working? Does their fund strategy have merit?

- What is your performance as to the overall performance of the fund?

Not so much the performance of the fund is important to you (it is to the LP) but the performance of the GP relative to other GPs in the fund. Is that GP truly respected or will you find yourself with a new board member as a result of uneven dynamics.

- What example of crossing the chasm can you talk to that match mine?

What is the merit of a GP statement, who tends to do deep dives in operational matters, without the necessary operational experience of having crossed the chasm himself, in life and/or business? What business has the GP demonstrated transitional success in that can act as the operational transition your company will need to go through.

- How many other companies are you on the board of?

Darting in and out and dropping bombs is what overloaded GPs tend to do. Prevent that at all cost, ask them how many board seats he intends to take on and how much time he allocates for every company and yours to make a serious impact.

- How many active funds are you a GP in?

GPs of older or larger VC firms have an array of funds they invest out of, some of which are stacked. Meaning they invest simultaneously out of different funds, from the same or different LPs, to mitigate their risk or provide early-to-late stage runway support. It is important to understand how many hats your GP is wearing and how fragmented his mind will be.

- How are your other funds doing?

Previous fund performance is an indication of the future, as disruptive innovation is resistant to economic aberrations. Do not buy into the external factors to blame for under-performance of a fund, in the same way your GP will not let you blame your under-performance on the same issues.

You are King

Nothing but the unique assets of the company determines its success. Every early stage company needs a CEO, one that builds the big picture, maintains the unique ecosystem and has the fiduciary responsibility to protect unnecessary dilution of shares. Do not raise money that does not allow you to deploy one nor rely on the Investors who think that their unique value add is better suited to make the company work in the early stages. Investors are not incented and ill-equipped (time wise) to be CEOs, let alone in most cases have no merit to be a CEO.

What entrepreneurs need from investors is the foresight, freedom and ability to think big and unabashed. Together, entrepreneur and investor should plot a trajectory, milestones and financial requirements to go from today's reality to where massive customer dominance lies. The future is in the hands of the entrepreneurs by virtue of who they select as their investment partner.

So, pick right and remain the King of your own destiny, or keep searching until you do. No amount of money can turn a bad marriage into success, unless of course if you are into it for the prenup.

Tags: Entrepreneurs, Innovation, NVCA, VC