Reverse screening: How do crypto project founders choose the right VC?

By Alana Levin, Variant Venture Partner

Compiled by: Luffy, Foresight News

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

A VC’s primary mission is to increase the odds of a company’s success. There are many ways a VC can achieve this goal, and determining how effectively each investor can support your startup should be at the heart of founder due diligence. If I were a founder, I would screen VCs based on the following criteria.

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

Can investors provide value other than pure capital?

I think so. In conversations with founders, here are some of the most frequently mentioned ways VCs can really help.

Brand: Getting backed by a “first-tier” VC typically (at least in the short term) boosts the company’s brand. This directly helps with recruiting talent. The brand halo effect is less important when hiring the first 10 employees, but it is critical to attracting talent once the company reaches Series A or later. Given the huge impact early hires have on the company’s trajectory and culture, founders ideally want to attract these hires from their own network.

A strong brand means that the agency or partner is well known, respected, and seen as an important factor in the success of projects. Success is the best brand.

Knowledge and insight: Does the investor have experience to draw on that could provide useful advice to the entrepreneur? Are they particularly good at identifying factors that influence the market or business?

There are really two things going on here: first, the relevant experience the VC may have from successful companies in their portfolio (or their own similar experiences as founders); and second, the clarity they can provide on broader market dynamics and how those might impact your company over the next 6-12 months.

Networking: Sometimes VCs can help founders (or other functional heads) get in touch with the right people. “The right people” might include other executives with relevant experience or potential customers. Founders still have to fight for business on their own, and few clients are acquired because of VC influence. But investors can certainly help open at least some doors that entrepreneurs want to enter.

Promotion channels: Some VCs have audiences, so being a “KOL” is part of the value they provide. This is obvious nowadays: many VCs are trying to build their own promotion channels through podcasts, newsletters, X accounts, etc. Sometimes, these channels can indeed be an effective means of increasing awareness and driving traffic to new startups.

You have received an investment invitation, what should you do next?

First of all, congratulations! Having the opportunity to choose from a pool of competitive investment offers is both an accomplishment and a privilege. Take your time and enjoy the process.

You likely already have some intuition about who you want to work with. The due diligence process often reveals things like the types of questions people ask, the insights they share throughout the process, how responsive they are in follow-up, and whether there feels like a cultural fit.

It’s time to test this intuition. Here’s the process I’ll follow, in no particular order:

Conduct background checks on investors: These should cover successful companies in the VC portfolio, as well as those that are on the brink of or have failed. It is important to understand how investors are partners in both successful and stressful situations. Ideally, these references are companies that your potential investor has also worked with.

Check for conflict risks: Does the firm have a history of investing in competing companies? More importantly, have they invested in any company that could theoretically compete with yours?

Consider the partner’s tenure at the firm: Often, you’re choosing an individual partner as well as an firm. I encourage more founders to ask potential partners about their ambitions and future plans. A related thought experiment is to ask yourself: If this partner left tomorrow, would you still be interested in this firm?

Determine if the firm is a good fit for your company: Whether a fund consistently invests in companies at the same stage as yours affects the usefulness of its resources, the degree to which your company is prioritized in resource allocation, and the relevance of the advice an investor can provide. A $5 million seed round from a $1 billion fund represents only 0.5% of its total allocation. Frankly, if a fund is investing $50 million to $100 million in later-stage companies, it becomes more difficult for the former company to get the attention and help of an institution in-house.

Understand the institution’s view on exits: This may sound a little strange. But in an era where IPOs are becoming increasingly rare, understanding how investors view acquiring or selling secondary equity can save you a lot of trouble later. Similarly, in the cryptocurrency space, understanding how investors view selling tokens can be a useful reference factor for token design and launch strategy.

Choosing a partner is often a one-way street. Picking the right VC will never “make” a company, but it can improve the odds of success and at least make life a little easier for the founders. Spending a few extra days doing due diligence on potential investors can pay off in the long run.