SAP Ventures' Jeff Nolan posted his response to 10 questions to ask a VC. All 10 of Jeff's responses can be found here, I've posted a few of the more interesting ones below (his responses are in red.)
When you fundraise and tell the story of your three most
successful investments, how will you describe how value was created for
LPs?
The answer to this question will give you some insight regarding how you might be expected to create value. For example, if the firm's biggest success came as a result of increasing valuation multiples through the consolidation of a fragmented industry, your company's strategy of creating value through innovation and organic growth might not be a great fit.
Listen, any VC who says "we're gonna do this, this, and this for our investments" is talking out of their ass. Every investment is different and the requirement is to build a strong relationship with management in order to know what the needs are at any given point in time. If a VC has a strong relationship with management, and can deliver good results in recruiting, strategy, relationship facilitation, and fundraising, when the investment has requirements for any of the above, then that's a good thing. What I don't necessarily understand is the question about value for LPs... you are either making them through doing good investments, or you are not. It's pretty binary.
May I get a copy of the "book" you sent around when you raised this fund?
What
promises did the general partners make to their limited partners when
they raised their last fund? How might those promises impact the
fund's relationship with your company?
No
What do you think the exit will be on this investment? Do you think it will be a financial buyer or a strategic buyer?
You
are going to be asked this question. It's only appropriate that you
find out up front what the expectations of your investors are regarding
this critical issue.
There are 4 possible outcomes, 1) you go out of business and lose all my money, 2) you get acquired by someone, 3) you go public, 4) this becomes a nice little business that is run for cash flow. Obviously #1 is bad, but #4 is bad as well because the only way I'm gonna get my money back is through #2 or #3. Can I predict when #2 or #3 will happen? No. Will either happen if you are executing on your business plan and become an opportunity or threat to other companies (for #3 specifically)? Yes. If it's an A round deal, well then you have more than a couple of years to figure it out, but if you are raising your EEE round of funding, then you better have a good answer for me about how you will achieve #2 or #3 pretty damn quick!
As you think about how to shape the company so that it is
optimally positioned for that exit, what three things do you think need
to be done in my company?
The general partners are measured
against their ability to deliver value to their investors. By what
metrics will you be judged?
Can't answer this one without knowing the specific company. However I will say that investors shouldn't be afraid to say "well I think your management team needs to be upgraded" if that is in fact the case. It's better to just put it out there and not dance around it. Entrepreneurs usually gut feel when they need to be upgraded and respond well to a plan that details how to do it.
What was your firm's biggest disaster as an investor? How did the investment go sideways?
There is a difference between a bad result and a bad investment. Does the investor know the difference? How did they behave?
I think it's fair to say that every bad investment is rooted in a sense that something will happen to turn it around and out of that hope we fabricate a reality to support it. Hope is not a business strategy. The best bad investment I was ever in was when the investor syndicate out of the blue said "hey this thing just isn't going to scale, let's shut it down now and return the money". We did, and we were right to do it rather than letting the company slowly burn away all of the cash.
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