The VC selection process is a very tough job for entrepreneurs (and previous round investors)... at least for those who have the privilege to have multiple alternatives in a round of financing (or even better those in situations like this: www.thevc.com/strips/Upside08.html ).
First time entrepreneurs and unexperienced investors tend to underestimate the huge amount of damage and value destruction potential of bad investors. Investors could roughly be classified in 3 groups:
- Those who know what their are doing and create (or rather help the CEO creating) value by being actively involved.
- Those declaratively or factually passive who piggyback on management and other investors.
- Those who know little to nothing about what they (and the business they invest in) are doing but nevertheless feel compelled to intervene and have a say on as many issues as possible.
Goes without saying that 1 - 2 - 3 above are really piramidally clustered with (unfortunately) a very large number of people in group 3. Avoiding 3 investors is in my view much more important than picking 1 vs 2.
I encourage entrepreneurs to do as much as possible first hand due diligence on their investors (and I impose myself the discipline to do it when I'm and investor in previous round). Due diligence means to call up managers and other past co-investors in order to be able to draw up an as much accurate as possible profile of the firm and most importantly of the partner in charge rather than relying on apparent signs such as known brand name or past investment successes (which might be in some case investment made decades ago by completely different individuals).
Of course it is important to be able to interpret and filter such due diligence feedbacks. As the relationship managers-vc and vc to vc isn't always in harmony and sometimes conflicts of interest (and of personality) occur, this isn't an easy task.
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