Editor’s note: Local tech media company BostInno (a division of the American City Business Journals) hosts an annual Boston State of Innovation conference. Leading up to the event, they published an article listing questions VCs never answer, as submitted by the community. These are all worth asking … and therefore worth answering. 

I was recently asked to sit on panel with my fellow VC peers and some top entrepreneurs from the Boston tech community. BostInno does a great job with their annual event, attracting thousands from around Boston and beyond. And kudos to them for shedding light on these questions that, according to the community, VCs don’t answer. If the community submitted these, then that’s a problem, so below, I do my best to answer them.

What’s the real reason you didn’t invest? Have you ever actually told a team you don’t believe in them?

Believing in a team often is not a binary thing. My conviction in investing in a company is a function of my belief in the team, the traction of the company, and how the product/opportunity resonates with me personally. If an investor seems to be looking for an endless string of proof points when you know that he or she has invested in companies at a similar stage in the past, it is a signal that their confidence in your team is lower than in some of these other cases.

To be more transparent, here’s my investing decision tree, published a short while ago.

How much money does someone really invest into a company if they believe in it? Have you ever invested in a company just for the sake of investing?

My POV is that every VC has a core product. For most funds, that product is a pretty highly engaged investment where the investor is looking to take a board seat and the company gets full buy-in from the VC partnership. I find that when an investor is making a core investment like this, they almost always truly believe in the company when they make the investment.

The challenge arises when VCs start to offer anything other than their “core product” — that’s the issue hinted at in the question above. Usually, this is in the form of a smaller investment or a chip-in, typically in the seed round, though sometimes at later rounds as well. Generally, my advice to entrepreneurs is to avoid these situations. Someone investing for the sake of it is not a recipe for success, and yes, it does sometimes happen. (I’ll speak to NextView in a second.)

Regarding the amount of money if an investor really believes: The best measure of investor conviction in a team and company is not so much check size as it is the VC’s investment of time. Are they not taking a board seat when normally he/she would? Are you getting a commitment to invest without having met or interacted with all the members of their investment team in some way? Is the VC letting you call references and offering those references, or do they seem to be holding back because they’d rather save those for other, more meaningful investments? Those are the stronger signals.

[Tweet “”The best measure of a VC’s conviction in you is investment of time, not dollars” – @robgo”]

For NextView specifically, we say that we are a one-product company. And that product is a highly engaged seed-stage investment where we are usually the lead or co-lead in a round and will often take a board seat. For every investment we make, our full investment team interacts with the company at some point in the process. Our investment size may differ slightly from one company to the next, but it tends to be driven entirely by situation-specific factors (needs of the company, syndicate composition, anticipated reserves, etc) … and not based on our belief.

Have you ever publicly stated (on Twitter or elsewhere) that you were a proud investor in a company that was struggling at the time? Investors only say they’re proud investors until after things are looking up.

This industry is surprisingly small, so honesty is the best policy here. For me personally, I try to tweet things that I find interesting (mainly tech related, but also the occasional NBA comment for better or worse). Or I might share things that NextView or our companies are doing that I find generally valuable to my followers and the ecosystem. I’d also question a founder who asks his or her investors to comment falsely on something — that puts the investor in an awkward spot. Luckily, our founders are all incredibly high integrity people, and we wouldn’t have it any other way.

In my opinion, VCs shy away from directly answering the questions pertaining to “at what point a company is fundable” or give a generic answer regarding revenue. I believe it’s easy to tell entrepreneurs that they are fundable when they are making money, but I always wish, with their experience and expertise, VCs would give more direct insights into what can be done to improve a venture’s chances.

For a seed investment, I think this question is pretty tough to answer. The reason is that the bar for “fundability” is very, very different from one company to the other. The more the investor is comfortable with an entrepreneur and has deep conviction about the market opportunity and product approach, the earlier the investor is willing to invest. So, the bar will be different for each investor, and for very early stage fundraising, the goal is to find true believers more than convincing skeptics.

(My partner Lee tackles this question of trying to recognize traction in the second half of this podcast interview. His take is that, like many big decisions, this isn’t actually black or white. There’s no trigger moment where you have traction or you don’t.)

For series A or later investment rounds, the dynamic is similar, but there are some benchmarks that might be helpful to target to know if you are at least in the ballpark. Here are some top-line metrics that I think are worth shooting for:

  • For marketplace businesses: $5M-$10M in annual GMV run rate
  • For SaaS: At least $100K in MRR
  • For ecommerce: >$500K revenue/month
  • For consumer social: hundreds of thousands of DAUs, possibly much more

In terms of other metrics, some ideas:

  • At least 6 months of cohort data that shows solid retention over time and signals a strong LTV relative to CAC
  • For consumer social businesses, DAU/MAU north of 40%
  • VCs also love businesses with a high degree of customer referral activity. They also love businesses where the value of a customer tends to expand over time. For example, a business with negative revenue churn, or an ecommerce company where basket size and purchase frequency tends of increase over time.

The last thing I’d add is what we mentioned into our pitch deck templates resource: You need to convey three things. First, that the problem you’re tackling matters. Second, that you’re the team to do it. And third, that it’s already starting to happen (or happening to a higher, more scalable degree, for later stages).

How will my company be compared against others in your portfolio when your partners are making follow-on financing decisions with limited fund reserves?

The simple answer is that of course VCs will invest more money into the companies that they think are most promising. But that does not mean that they will not support a company that isn’t one of their high-fliers.

The questions to ask are…

  1. What is the the firm’s model for ownership and follow-on investing?
  2. How does the firm behave when things are going well, but there are challenges around securing an outside-led follow-on financing?
  3. How does the firm behave if you are knocking the cover off the ball?

At a high level for us, we invest in roughly 30 companies per fund. We expect that a half to two-thirds will achieve product/market fit and warrant further investment. We typically buy most (if not all) of our ownership in the seed round and look to maintain ownership over time. If there are ways to increase ownership in our winners, we try to do it, but usually only do so fairly modestly. If a company needs a seed extension and we believe in the opportunity, we will usually participate in these rounds and will often work with founders to structure the terms of such a round. We usually invest something like 1-2X our pro-rata in these situations, but we also partner with the broader syndicate (or potential new investors) to expand the size of the capital base.