Reverse screening: How do encryption project founders select suitable VCs?

Compiled by: Luffy, Foresight News

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

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

First of all, can VCs really increase the chances of project success?

Can investors provide other value besides just pure capital?

I think it is possible. Through communication with the founders, here are some of the most commonly mentioned ways in which VCs can really provide assistance.

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 plays a slightly smaller role when recruiting the initial 10 employees, but becomes crucial for attracting talent as the company reaches Series A funding stage or beyond. Given the significant impact that early recruits have on the company’s development trajectory and culture, it is ideal for founders to attract these talents from their personal networks.

A strong brand means that the organization or partner is well-known, highly respected, and considered a key factor in the success of the project. Success is the best brand.

Knowledge and Insight: Do investors have experiences that can be learned from, thereby providing useful advice to entrepreneurs? Are they particularly adept at identifying factors that influence the market or business?

There are actually two points here: first, the relevant experience that VCs may accumulate from successful companies in their portfolio (or similar experiences as founders themselves); second, their ability to provide a clear understanding of broader market dynamics and how these dynamics may impact companies in the next 6 to 12 months.

Networking: Sometimes VCs can help founders (or heads of other functional departments) connect with the right people. The "right people" may include other executives with relevant experience or potential customers. Founders still need to rely on themselves to win business; very few customers are acquired because of the influence of VCs. However, investors can certainly help entrepreneurs at least open some doors they want to enter.

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

You've received an investment offer, what should you do next?

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

You likely already have some intuitive judgments about the party you want to collaborate 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 sense of cultural fit, among other things.

It's time to validate this intuition. Here is the process I will follow, in no particular order:

Conduct background checks on investors: These checks should cover successful companies within the VC portfolio, as well as those that are on the brink of or have already failed. It is important to understand what kind of partner the investor is in both successful and stressful situations. Ideally, these references are companies that have also partnered with the investors you are considering collaborating with.

Check for conflict risks: Does the institution 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 institution: Generally, the choice you make is both an institution and an individual partner. I encourage more founders to inquire about the aspirations and future plans of potential partners. A relevant thought experiment is to ask yourself: If this partner were to leave tomorrow, would you still be interested in this institution?

Determine whether the institution matches the stage your company is in: whether a fund continues to invest in companies that are at the same stage as your company 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 investors can provide. A $1 billion fund providing a $5 million seed investment only accounts for 0.5% of its total allocation. Frankly, if a fund invests $50 million to $100 million in later-stage companies, it becomes more difficult for earlier companies to gain attention and assistance from the institution internally.

Understanding the institution's view on exit: This may sound a bit strange. However, in the current era where IPOs are becoming increasingly rare, understanding investors' views on acquisitions or the sale of secondary equity can help you avoid a lot of trouble in the future. Similarly, in the cryptocurrency field, understanding investors' perspectives on token sales is a useful reference factor 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 for the company and at least make the founders' days a bit easier. Spending a few extra days conducting due diligence on potential investors may yield returns in the long run.