When you start to raise venture capital for your company you’ll quickly find there’s a common process each venture firm utilizes.
Once the partners have agreed to make an investment in you, their offer will come in the form of a term sheet.
You have to appreciate the fact that these firms are constantly pitched by every entrepreneur with an idea, so their first order of business is to separate the serious entrepreneurs who want to raise venture capital from the crazy ideas they want to run away from!
Every entrepreneur looking to raise venture capital goes through roughly the same process. They start with an introduction to the firm, get invited to pitch, make their way through a few successive meetings, and eventually wind up pitching the full partnership for a final decision. From there they hopefully receive a term sheet and begin due diligence to get to a close.
As you’re making your initial contacts to find venture capital firms, you’ll probably be guided toward the inbox of the venture capital associate. The venture capital associate is the front line executive of the firm, typically the most junior member of the team. Their job is to weed out who should talk to the partners and who should get a warm goodbye.
Associates can be valuable allies in getting prepared to talk to the partners and understand the firm, but be very clear about one thing — they cannot make investments. They can tell you how much they love your deal, how smart you are, and how great the deal would be for the firm, but until you’re meeting with at least one partner, you’re still only on first base.
Your goal, therefore, is to target a meeting with a venture capital partner.
The associates’ goal is to screen you, prep you, and if they feel strongly, recommend you to a partner at the firm for further review. The associate is graded by their superiors by how well they do this, so they are very inclined to make sure you look good, so they looks good.
You’ll be graded on how well you get past the associate.
If you haven’t gotten to the partner presentation you’re not likely to get past the goal line.
Whether you go through an associate or get straight through to a partner, the relationship starts and ends with the partner. The partner is most likely going to be your ally for life. They’ll likely be the one who joins your board, and they’re likely going to be the one you spend all of your time with. You’ll meet the other partners if they like your deal, but you’re only going to substantially deal with one person.
When the venture capital partner is meeting with you, they are thinking one thing: “Is this deal worthy of presenting to my other partners?” Venture capital firms tend to consist of a group of partners who rely on the individual partners to vet deals and present their best options. If you can’t convince the partner to endorse you for a meeting with their fellow partners, you’re not going to move forward.
The final act in this story is the “partner presentation” where you will present your pitch to the full partnership. Most venture funds vote unanimously for new deals to be approved, so even one partner that isn’t behind you is a problem.
If you haven’t gotten to the partner presentation you’re not likely to get past the goal line. Even if you’re hearing all great things from everyone you’ve met, until you have that meeting you don’t really have a forum where the investors can make a real decision.
Once the partners have agreed to make an investment in you, their offer will come in the form of a term sheet. A term sheet is an overview of all the key terms of the deal, which will later be taken into a more formal legal agreement between the two companies.
The term sheet’s purpose is two-fold. It’s a letter of intent that shows the entrepreneur that the firm is serious about the deal and it’s an offer letter on what terms the venture capital firm is willing to invest. The latter is far more interesting, since it sets the valuation of the company, the amount invested, and any important rights or provisions the investor wants as part of the deal. If some of the terms confuse you, we would recommend taking a look at our article on Common Venture Investment Terms.
The due diligence process may occur at almost any point in the process of pitching venture capital firms based on how comfortable they are in understanding your deal. Some may begin digging into the details of your company even before you get to pitch a partner, so that they are sure they want to get more engaged on your deal.
Otherwise it will tend to occur after a term sheet is issued. A venture capitalist doesn’t want to spend countless hours digging into your back story if you can’t even agree on what terms they might invest. The most valuable asset of a venture capital firm is time, so spinning cycles on a dead deal is a huge problem.
The due diligence process will vary per firm and deal. If the company is still in the early prototype stage there may not be much to dig into, but if the company is already up and running and generating revenues, the venture firm will certainly want to look at financials, talk to customers, and make sure you’re a solid investment.
The final step of pitching a venture capital firm is the “the close.” This means both parties have agreed to the terms within the term sheet and are ready to begin the legal process of updating their respective legal agreements and ultimately transferring the funds to your bank account.
The close is not quick. Entrepreneurs sometimes think that since a “deal is done” and the terms have been agreed upon, that the money will show up any day now. That simply isn’t true. The deal is then handed to the attorneys from both parties who will begin getting into the nitty gritty of the legal agreement where certain problems can then pop up later.
Even a fast close can take 30 days. A more typical close is longer than 45 days. 90 days would mean there were probably some points of contention between the entrepreneur and the investor. Longer than 120 days means the deal can potentially be at risk. Faster is better in this case.