Most people dream of three magic words, but for founders raising venture capital there are seven magic words which might mean even more: “We’d like to make you an offer…”
1. The informal synergy conversation
This is a short two-way discussion for the investor to get to know and understand a bit more about the company.
It usually involves high-level questions in an informal format to enable them to understand the product and founder(s), particularly if it is an area that they have not looked at in detail before.
It is also a chance for the founder(s) to get a sense of how the venture capital fund operates and what value they may add as a business partner. Questions usually revolve around fund size, sweet-spot cheque size, minimum revenue thresholds, annual deal volumes and sector focus.
2. Management presentation and investor research
Following the initial meeting, the Deal Leads (typically a Partner and an Associate) meet to share notes and pinpoint the key area that makes the opportunity potentially investable. They will identify where they need to gain a further understanding and, therefore, where to focus their research.
The research is usually a mix of desk research and consulting with contacts/management teams in their network and portfolio who have a good understanding of the market.
There’s often a further short call to help the investors gain clarity on any other issues that have arisen. It is often at this point that they are given access to the data room which more often than not includes the financial model.
3. First Vetting
Most funds will ask the Deal Leads to put together a short summary of the investment opportunity. The summary is circulated to the wider team a few days in advance of their regular meeting so that they can examine the investment case. The wider team will include members of the Investment Committee who will make the final decision.
This is a two-way process. The Deal Leads will also be getting a steer on the areas of weakness or the need for more information if/when they submit a formal paper to the Investment Committee. The reaction to their short summary will also show where support for the investment lies internally.
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4. Meeting the wider team at the company
It‘s likely at this point, in non-COVID-19 times at least, the Deal Leads will spend approximately half a day at the offices of the company. They will be “doing their due diligence up front”.
They will take a closer look at the product, meet key management across various functions, and have further discussions with the founder(s) as well as the wider management team.
Some management teams feel like this is over-kill. However, it’s important to understand that although it may take the investors slightly longer to get to a decision this way, the probability of the deal not completing are heavily reduced.
5. Early customer/commercial due diligence
Calls with actual customers of the company are an invaluable way of assessing product-market fit, product differentiation, and strength of need. This research really helps investors test and confirm their investment theories in a commercial context.
This is a key test as it is based on the actual performance of the product/company in the real world rather than in the ambitions and aspirations of the founder(s).
6. Pre–Investment Committee memo
This is an additional step that not all investors go through but it is one that ensures the Investment Committee stage is more of a tick box exercise. When it happens it reduces the importance of the next usual step, the Investment Committee presentation. It’s an opportunity for the Deal Leads to put the investment case and drive the sentiment around valuation.
7. Investment Committee presentation
This is where the founder(s) are invited to present to the Investment Committee. The Investment Committee is usually comprised of a majority of the senior decision makers at the venture capital fund. I guess you’re sitting there reading this thinking, finally, the Dragons Den moment, well not quite because in real life, it doesn’t quite work like that. Each stage of the process is equally important and each ultimately leads to that final decision, so often stage seven is a tick box exercise.
8. Term sheet
After the Investment Committee presentation, the committee decide whether to make an offer, known as a term sheet, and the founder(s) hope to hear those seven magic words, “We’d like to make you an offer…”
If you are the founder(s), you will want to crack open a bottle of champagne and pat yourself on the back. You should, because you deserve it. You should also know that in many ways the hard work is just beginning because the next stage is due diligence! But that is for another article...
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