facebookHow is a Venture Capitalist's Investing Decision Process usually like? - Seedly

Anonymous

22 Apr 2019

General Investing

How is a Venture Capitalist's Investing Decision Process usually like?

Discussion (2)

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Speaking from the perspective of someone who has been in VC for around a decade, it makes sense to first start off with understanding a Venture Capitalist's objective: ROI.


Now with that in mind, let's look into the full spectrum of what the investment team does, to show the full process:

  1. Origination - ie. sourcing for deals
  2. Initial deal screening
  3. Conducting due diligence (this includes competitive assessments, customer calls, reference checks, market size, technology due diligence)
  4. Building models to evaluate the deal and test assumptions put forth by the entrepreneur
  5. Reviewing company financials, business plans and other materials shared
  6. Offer a term sheet to the company (NOTE: it is NOT a done deal at this point)
  7. Legal comes in to look at the legal/documents. This is the part where all the finer terms including and above liquidity preferences, board-observer rights, lock-up period, valuations etc are all put up for discussion.
  8. Once the investment team has all the parts in place, they usually put forth a pitch to the partners (who usually review anywhere from 5-20 deals in a meeting)
  9. Usually its majority vote wins. If the investment board decides to invest, that's when Finance is roped in to look at disbursement of funds together with the investment team.
  10. Post-investment monitoring. While some funds request for monthly financials and business update, other funds are more flexible and only step-in whenever the entrepeneur requires help - ie. more hands-off.

Having recently networked with some VCs and currently in interview stages for VCs abroad, I am more aware of the framework behind VCs decision process.

Evaluation process

1. Background understanding

VCs usually have specialized niche sectors they are more invested in and have prior background understanding. They are more likely to invest in these areas and are up to date with latest developments are startups here.

2. Business Proposal(ideally given)

If it is the VC got approached, they likely have access to this document.

3. Self Research

VCs look out for promising startups and new kids on the block here and do their own backend research especially if they seem promising

4. Business Proposal(request if not given)

VCs can be the one to approach these startups for this. VCs can view their financial projections and fully evaluate their business model and strategy with this. Pre-emptive VCs can even draw up their own valuation and financial projections for the company.

5. Listen to founders pitch

Get pitched for funding and clear up any doubts and queries.

6. Bang out financial projections and eventual valuation

Can be done prior to Step 5 if VCs are quite committed to investing already.

7. Ultimate Decision Time

VCs will convene with Founders on another occassion to negotiate terms of investment including preventing excessive dilution, liquidation preference, board seats etc.

Bare in mind this is not a one size fits all industry structure and might vary across practices between startup cultures in diff countries.

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