How do you evaluate the fit and alignment of the investor and the entrepreneur beyond the term sheet?

Your investor is not only providing you with an investment, but will also play a central role in key decisions for your company going forward. One example is to understand the investor's thesis and view on your industry. This will help you determine whether you're aligned on the long-term vision. In addition, you'll want to be conscious about the type of investor you're looking for - are you looking for an active investor who can provide detailed advice, but who could also become too opinionated? Or someone who gives you more freedom, but where you might at times lack strategic support? Typically, early stage investors and family funds will be more hands-off whereas late stage investors and PE funds tends to be more involved.

Following investors and the team on social media has been particularly helpful to me. Twitter and LinkedIn feed of people give you a good idea of what's on top of people's minds, things they're focusing on, startups and values they champion. And their activity on the platforms can also give you several opportunities to interact informally several times before you indulge seriously.

Investors often spill the beans about what they look for in speeches and Q&A sessions. Pay attention to these, and you can twist your pitch to make your startup look like their dream investment. It's like tailoring your outfit to impress at a party – you'll stand out, but you'll still feel like yourself.

I've witnessed numerous instances where startups have found themselves ill-equipped when navigating the fundraising process. Fundraising should be a very planned process that demands substantial effort, particularly in terms of research. The fundraising team meticulously constructs a database comprising funds that align precisely with their developmental stage, whether it be at the idea stage, early stage, or during the growth phase. To facilitate this process, I recommend the creation of an Excel spreadsheet that includes at least details such as the fund's name, the identities of its partners (both General Partners and Limited Partners), historical investments, preferred investment size, and its overarching investment thesis.

The journey of alignment starts with deeply understanding the investor's unique style. It's like digging into their success treasure chest: what secret fuels power their accomplishments? Think of their investment approach as a tapestry woven with cultural threads - what patterns emerge? And picture their thoughts as symbols, like road signs pointing the way. Imagine I'm a visionary entrepreneur who learned from Steve Jobs and Elom Mask. These questions become my guiding stars. This exploration weaves a magical connection, like a spell that drives both of us ��� the entrepreneur and the investor – on a shared journey toward exciting new horizons.

I often say to founders that the investor's team is more than just a group of people checking up on you – they’re your connection to the investor. Building a casual, friendly relationship with them might make your journey smoother. It's like getting to know the family before a big wedding; it makes the big day feel more comfortable, and you'll know what to expect.

While this is true, always be sure to discover and build rapport with the decision maker for investing first. I find founders often get very close with analysts and think they have a solid yes coming, only to find that the managing director or other partner found something distasteful about their project and passed during the investment committee meeting.

It's like marriage. Make sure you're comfortable together and can feel the same motivation and vibe. It's important to understand how much time investors can afford to spend with you and if there are pre-planned in-person activities like founders' camps and annual gatherings.

VC is a marathon, a 10-year game, a marriage. You want to make sure you end up with the right “person”. Running a reference check on your investors is must-do for a founder. Check the way they interact in meetings. Focus on little things. Do they show up on time? Do they communicate transparently? Do they give you valuable feedback? Do they make every interaction valuable? If so, ✅

Founders are very familiar with investor due diligence whereby investors hold several rounds of discussions with the team, Q&A on dataroom materials etc. What is less well known is the founder performing due diligence on the investor, or in other words, reverse due diligence. This is essential for early stage companies as the quality and composition of a cap table could have material impacts on future funding rounds. Therefore, founders need to tap into their network and ask probing questions. Try to speak to different people in the ecosystem to form a complete picture. For example, speak to competing funds across different stages, portfolio companies, advisors, LP's etc.

How do founders position themselves if they become investor? I think the answer to above question will give founder answer to the question if the investor is right fit for his/her startup. If the investor is exactly like the one if they become investor then they've their right investor. Now similarly, How do investor position themselves if they become founder? If the traits are matching with the founder they want to invest, then that should be consider right fit for the investor.

In my experience, Negotiation is crucial and I have negotiated deals ranging from rights, ownership, access to cash flows and governance. Some of the challenging areas of negotiation in my experience with startup was: [1] Include Ratchets (anti dilution provision) in case of a down round. [2] Conversion and Liquidation preferences Real life examples that I have seen in negotiations include: 1)When SoftBank was concerned on Uber governance they negotiated 2 board seats to monitor the company 2)Tencent negotiated for voting rights when investing in Snap chat to have a role in the firm decision making 3)While WhatsApp negotiated with FB for its brand preservation and autonomy resulting in FB preserving WA value post acquisition.

I feel negotiating the terms isn't just about legal clauses; it’s a teaser of your future relationship. See how they handle disagreements. Are they rigid, or do they show flexibility in areas that matter most to you? Also If possible, talk to other entrepreneurs who've negotiated with them. Observing how the investor's behavior during this stage reflects their true nature.

Investors usually have specific industry focus. They should have previous experiences in investing in the industry and have the ability to understand the core technology of the enterprise. Time should be spent in sharing the entrepreneur's vision and business plan in order that the investors would not push for short term gains.

Term sheets are meant to establish funding agreements, but in China, some funds are abusing them. Issuing term sheets arbitrarily has become more common, which allows some funds to conduct due diligence without any intention of investing. This unnecessarily burdens companies that are not seeking investment and can distract from their core business activities. Additionally, some companies use term sheets to raise prices for different funds, leading them to seek multiple term sheets and driving up equity prices. While this may provide short-term gains, it can be detrimental in the long run as it can lead to the perception that the company is overvalued, making it harder to secure future funding.

Exits: Talking about exits might feel like discussing the end of a friendship when it's just begun. But you have to see " How does your investor approach exits?" Are they all about a quick flip, or do they have a history of supporting long-term growth? Understanding their exit mentality isn't being cynical; it's aligning expectations.

Venture Capital as a form of financing that only works if the company is capital efficient. It's essential to check that the product/business model can scale, and that the team is not wasting money. That's why founders living a lavish lifestyle, or employees maxing on that corporate credit card can be red flags.

Consider this as a marriage; you need to feel how the dynamics will go, how well you'll go through up's and down's - this is a partnership, not just a financial transaction. Choosing the right investor requires tons of soft kills, not just analytical skills.