VCs like to give out homework. They won’t call it that, though. But rather they use words like “diligence” and “information requests.” Just like in school, the homework can actually be productive, as in this case it can lead to a new customer or advisor. But just like bad teachers did in grade school, VCs sometimes assign completely useless busywork.

Receiving a homework assignment or two after initial meetings with a venture capitalist is generally a good sign – it signals that the potential opportunity is interesting and exciting enough to engage further. They’re often positioned as simple diligence requests that (actually often genuinely) help an investor get a better sense of the startup and its prospects. Yet as those initial assignments turn into an endless string of assignments, the signals can turn south. At the best it’s an indication of indecisiveness, and at the worst repeated homework can be indicative of bad intentions to show minimal engagement to “hang around the hoop.”

There are a number of reasons why venture capitalists give out homework to entrepreneurs who have pitched them… usually the rationale isn’t one of the following, but rather a combination:

1. Answer specific questions. Whether it’s about the market, competition, etc., VCs typically want to “get smarter” about a domain, especially if they’re less familiar.
2. Validate thinking. VCs walk out of a pitch with a thesis – it might be about the team or the market opportunity or whatever – but they like to hear from others that that thesis is indeed sound. In other words, they seek supporting points to verify their reasoning.
3. Overcome their partner’s objections. If a new non-linear homework assignment comes up mid-evaluation process, it’s typically a direct reaction to a VC’s partner objecting to the investment on specific grounds. The homework assignment can be a way to provide ammunition to overcome those objections politically (especially within larger firms).
4. Build trust. Sometimes the content of the assignment is irrelevant, but rather the VC is utilizing the process as a way to build a rapport and see how an entrepreneur interacts beyond an hour pitch-meeting. The process can reflect if an entrepreneur listens well and is open to feedback, meets expectations about output, and generally does what he says he’s going to do.
5. Delay. Going through a process of repeated diligence requests can sometimes be intentional stalling tactics to a deal process, allowing VCs to gather more data and preserve optionality for as long as possible.
6. Play chess. Assignments can be a part of a larger power-play game with respect to negotiation of an eventual deal.

Given the above motivations, a number of kinds of homework tasks can emerge:

1. Produce more internal reports. Often VCs are looking beyond the headline numbers in a pitch deck to validate that the “traction” is truly real or just spun for a presentation, but other times the requests are just to verify what an entrepreneur said is true is.
2. Produce financial models. Sometimes these spreadsheets are helpful to run different scenarios about what the drivers are of the business are and/or outputs under different sized capital raise. But more importantly, it’s a way to demonstrate deliberate thoughtfulness about the business. However, there is a risk (and I’ve seen it happen) of VCs sending an entrepreneur on endless modeling exercises which are completely useless – you can’t dictate the impossible into reality, but you sure can model it.
3. Assemble (third-party) reports. Additional information about the market sizing, competitive dynamics, potential acquirers, etc. can help educate an investor about a space where s/he is less familiar.
4. Allow for customer / partner / advisor / employee conversations. It’s sometimes a sensitive topic to allow potential investors access to key constituents within an emerging organization, especially customers, but they are often the most revealing about the opportunity and can be the final convincing data to push an investor towards conviction.
5. Talk with a own domain expert. VCs have their go-to people in their network, sometimes formally affiliated with the firm or sometimes just friendly informal relationships, who they introduce to entrepreneurs to hear their perspective on the opportunity (see #2 and #3 above).
6. Talk with new potential customers or partners introduced by the VC. Often if a VC has made other investments in a (related) space, he is able to introduce potential new customers or partners to a company even before making an investment. These kinds of intros (if they’re actually apropos) can be beneficial to the startups, but they also give an investor the ability to first-hand see how a potential new customer reacts. Trouble, however, can arise if that customer isn’t as good a fit or has another idiosyncrasy which generates erroneous feedback back to VCs.

In all of the above, I haven’t shared a value-judgment to either the motivations for these assignments or the types of them. But it’s clear that some can be quite constructive for a startup, while others can be neutral to even unconstructive. My partner Rob Go wrote a post a couple years ago about interpreting diligence requests to figure out whether indeed they’re “bad” or “good.”  Because just as a VC uses the diligence process itself to evaluate an entrepreneur as the leader for an investment opportunity, entrepreneurs can similarly use these interactions to decipher if a particular VC is going to be a good partner to the company going forward once an investment has been made.