Anatomy of a VC Investment: What to Expect in Your Fund Raise Process
This post originally appeared on blog.up.co
Fundraising is an important part of most entrepreneurial journeys. If you are an entrepreneur, the standard process followed by many venture capital firms is well worth knowing. While every case is unique, having an idea of the key stages means you will have a sense of where you really are, what you have achieved, and what is left to achieve in order to secure funding.
To keep this post as useful as possible, I have not written-up exactly how we do it at my own firm, but I have instead tried to break the process into eight stages that many firms will go through.
A good investor will know about you, your company and your market before you speak to them for the first time.
Good VCs track AppAnnie, Alexa, Linkedin, GitHub, ProductHunt and similar services to spot interesting companies and monitor trends. They also keep up to speed with highly-rated angel investors, syndicates, seed funds and incubators to ensure they hear about the companies and founders who are impressing the other investors they respect.
On the entrepreneur side of the conversation, you can start early too. While you have to build your product and company first, it is worth spending some of your time with investors, before you actually need or want to raise money.
Two: Initiation of the Process
Depending on the situation, either the company or the investor can start fundraising process.
If you want to make the first move, you should ping a personal note to the investors that you already have a relationship with, signaling that you are thinking of raising money. For those you don’t know, avoid a cold email and either build a quick relationship (meet in person at an event, etc) or use your network (angel investors, employees, friends) to get warm introductions. I wouldn’t give a huge amount of information away via email too – it is always more powerful to give your ‘pitch’ in person or even over the phone.
Sometimes an investor who has been tracking a company closely (in some cases they are already an investor, in other cases, not) will pre-empt a fund raising process. Nakedly, this is because they are excited by your company and want to own part of it before it gets bigger or is better known. You need to decide if this aligns with your needs too.
Three: Early Process
If a VC is interested, a number of people at the firm will now get to know you. Expect to go through your deck two or three times as you meet a combination of Partners, Principals, Associates and Analysts. Be sure to know what each of these people do and how they will play into any final decision-making process.
During these meetings, you will be answering a lot of questions on your background, your team, and what the company and its products do. Be prepared for people to dig deep on the specific challenges that face your sector. If you run a delivery marketplace, you’ll be asked about unit economics; if you’ve built an advertising technology company, you need to know about what Google and Facebook are doing; and if you the CEO of an open core software company, you’ll be asked about your engagement with developers, and your conversation rate to premium software.
After you have run this gauntlet of questions, your answers will be reported back to the firm. An internal discussion, sometimes enhanced by external expert opinions, will take place. Ultimately this rolls up into a decision of whether they want to dig deeper.
Four: Deep Process
More than one partner usually gets involved at this stage. Usually just two, but sometimes (in smaller firms) all of the partners will participate. You will be expected to go into a huge amount of detail, so ensure that you know the finer points of your company and your market.
The objective of this stage is to really get to know each other. If an investment occurs, you may work together for many years to come and so, for both sides, it’s important to get a feeling of how that could work.
Articulating goals, hopes, and concerns is important – it is way better to have these understood and agreed upon at this stage, rather than discover them further into the relationship.
Typically there will also be a lot of third party due diligence and the investor will probably ask for references – both on the founders as individuals, and from customers and partners of the company.
All the while, the Partner you’re spending most time with will be preparing a much lengthier investment memo or dossier that contains all of the information that has been gathered, along with her view on each aspect.
Five: Partner Meeting
You will be invited to meet the whole team. This may be over videoconference, but more usually it will be face-to-face and, wait for it, you’ll do your pitch again. Expect lots of questions. Many of these are factual in nature – understanding the product and the company – but many are also posed in order for your potential investor to better understand you, your team and your personalities. The way you answer the question is as important as the answer itself.
Feel free to ask your own questions. You should already know one of the partners extremely well, but will the rest of the firm do for you?
At the heart of a great investor/entrepreneur relationship is a mutually respectful, two-way dialogue. Today is the day to start that dialogue.
Six: Term sheet
Assuming you impressed the team at the partner meeting and the firm has decided to invest, you will be issued a term sheet.
A term sheet is a high-level document that sets out the proposed investment, the valuation of your company, the terms pertaining to the investment and also what you can expect from the firm in addition to the financing. Often these are only one or two pages long. I’ll cover term sheets and what to expect in a future post.
If everyone is happy, all parties sign the term sheet. At this point everyone is signalling that they want to do this: you are almost done.
Seven: Post-Term sheet diligence
This part of the process is highly detailed, but straightforward. The diligence will involve lawyers, accountants and security, identity and technology experts who will ensure that everything you represented during the early part of the process was accurate. Assuming you didn’t lie at all, you should have nothing to worry about. Minor misunderstandings are common and usually cleared up quickly.
In parallel, longer documents will be drafted to detail the basic terms contained in the term sheet. Lawyers lead this part of the process but it is key for both the entrepreneur and the VC to remain engaged.
The Promised Land. When the diligence is completed, and no major questions have been raised, the documents will be signed and the cash will be wired. And then it starts to get really interesting…