Interviewing Your Investors
Get to know potential investors before signing term sheets
Happy Thursday 👋,
During a recent venture capital conference an audience member asked a panel of investors to provide examples of when they may have taken a more active roll in helping manage a portfolio company or move beyond a board advisory position. The question is often is not asked as most of the time investors are the ones interviewing companies instead of companies asking investors specific questions.
A Market Shift
The chart above shows the number of venture deals through the second quarter of 2022. Since the peak in 2021, activity has declined by 25% with the slowdown impacting all levels from angel investments to later stage transactions. As deal flow slows, investors are competing for fewer investment opportunities, giving companies greater leverage in the market. The slowdown also allows companies to become more selective regarding potential investors.
Capital Availability Remains High
Despite a few years of record deal flow, available capital in the venture marketplace remains at a record level of $290 billion as seen in the above chart. The volume of available capital combined with a slowing deal market puts more pressure on funds to find investment opportunities, allowing companies to be more discerning and find investors capable of providing support beyond just a financial investment.
So What Should We Ask Investors?
The new bargaining power of companies should be used with care to not scare away investors with a detailed interview process. Instead we advise companies to build a wish list such as a more active mentorship or advisory position, help with areas such as supplier introductions, or opportunities to network with others in the industry.
Consider using the following as ideas to discuss with potential investors:
Understand what other companies investors have funded in the same industry as a way to develop synergies.
Ask about the level of company involvement and examples of prior interaction with portfolio companies. Some venture investors enjoy more day-to-day involvement and advisory work while others take a very hands off approach.
Discuss options for follow-on investments or bridge financing as sometimes a company needs additional capital or short-term funding. Most venture capital funds allocate a percent of the fund for follow-on investments so it helps to understand how this process works before it is needed.
Review outside involvement of a fund’s partners to understand if there are greater opportunities for pilot programs, new market options, or an ability to expand the client base.
A combination of a market slowdown with record levels of available venture capital allows companies to be more selective regarding their investor base. We suggest companies use this time to get to know potential investors and consider including those which may be able to bring more than just a financial investment.
What We Are Reading: Food Service Robots
Had lunch this week with a friend who has been in the recruiting space for almost 40 years. We discussed the future of work and how robotics and machine learning are becoming more common. A great example is Chipotle stores recently transitioning to artificial intelligence and machine learning. These advancements should help reduce waste and improve supply chain efficiencies but it also may eliminates more jobs.
Or maybe instead of eliminating jobs the increase in AI and robotics makes front line restaurant workers more productive. A recent study found the average restaurant or hotel worker manages at least 11 different tasks during their shift with those on the morning shift having over double the amount of work. Automating some of these tasks could allow employees to spend more time focused on customers.
Thank you to all our new readers as our newsletter family continues to grow. If you know someone who might be interested in our discussions, let them know about us as we always enjoy having more smart readers join us every few weeks.
Wishing everyone a great weekend.
- The Caymont Team