Is that VC BROKE?

Not every investor is legit.

I’ve seen founders lose 9 months because their “investor” talked a big game but just never seemed to wire the money.

Shocking that we’ve come to this, but here’s the thing:

Some ostensibly-credible VCs will issue termsheets even though they don’t have any money to invest.

It’s complicated because most founders don’t feel comfortable asking for proof of funds.

But you never know - an investor could be:

• On a “fishing expedition” where they’re just looking for information about you
• Trying to pull together a syndicate that never materializes
• Just trying to stay afloat

Or, they could be 100% for real.

It’s up to you to know how to tell the difference.

Here's how:

Step 1: Do your mini-Background Check

First step: do your research.

• Check the fund’s website. They’ll have a list of past deals
• Cross-check their track record vs public deal sources & aggregators. I’d use OpenVC (use code EVAN20 for 20% off) or CrunchBase
• Possible to triple-check with something like Landscape
• Check their last 12 months’ press releases. Any announcements of new funds they raised?

These markers will be clues.

But desktop research isn’t enough. You’ve also gotta…

Step 2: Ask!

Most founders never even ASK about their investors’ source of funds.

For VCs specifically, you won’t get a proof of funds.

…not because they don’t want to give it to you.

But because a VC with a $500 million fund doesn’t hold $500 million in cash ready to invest.

Typically, a VC…

• Has a series of capital commitment contracts with their investors (Limited Partners, or LPs)
• When they find a few good investments and need the money, they make a capital call to LPs
• LPs then wire money to the VC, who then invests it into you

So your VC isn’t sitting on a boatload of cash. It’s just “there when they need it.”

…unless it isn’t.

Here’s what you can ask to get a better sense of whether you shouldn’t count on their LPs:

1. Any issues with LPs coming good on capital calls?
2. Did you ever not complete an investment due to capital call issues?
3. Are your 3 largest LPs institutions, family offices or individuals? [typically, a Pension Fund is highly unlikely to default on a capital call, whereas large individual investors can play games all the time]

But even if you know those things, you still need to…

Step 3: Trust your gut

Does it feel real?

One Seed-stage founder I work with received an unsolicited approach from a UK VC, and he wanted to know if it was real

• Business is in US, vs. fund in UK
• Funds from abroad don’t really lead investments internationally until at least Series A

It turned out that this fund was just auto-emailing startups that had signed up to do a certain group’s Demo Day, and there would be zero chance it’d be a good fit.

He trusted his gut, asked early on, and got the answer he figured would be the truth.

Had he wasted his time betting his hopes on this magic foreign investor, it would’ve been just a load of malarkey and dashed hopes.

Trust, but verify.

Don’t trust an investor further than you can throw em.

Don’t be shy to ask, either.

After all, their business is dealing in money.

…so why shouldn’t you be skeptical, especially when the speed of your business’s growth depends on them being legit?

Keep your eyes open out there.