Steps and Processes of Gaining Capital from a VC Investor

by Startacus Admin

Our last two venture capitalist articles covered the questions to expect and to ask at a VC meeting, and how to get the most out of a VC meeting. We promised to go over how the process works and give some more insight into what to expect from the process of gaining capital from a VC.

First, let’s start with the basics. A venture capitalist - in the form of an individual, partnership, firm, subsidiary, etc. - doesn’t give companies money out of the goodness of their heart, or even for a high-interest repayment; a VC provides capital in return for an equity stake in the company and often a say in the operations. And they typically look to reap their return on this investment in roughly the first 3-10 years. This means that it is perhaps the hardest route to gaining capital; however, if you successfully persuade the VC of the long-term potential of your company, you will gain access to their own expertise and network along with the money. So it’s potentially the most rewarding route to funding, too.

VCs will likely have preferences as to what kind of funding they provide. You will presumably know what funding stage you are at, but here is a quick and very basic rundown:

• Seed Stage - You are literally just starting and need to develop a sample product, conduct market research, pay for admin set-up costs, etc.

• Startup Stage - You have a sample product and need to recruit, finalise the product and introduce it to the marketplace, etc.

• Early Stage - You are two or three years in, with management in place and your product on the market, and now you need boost productivity and sales

• Expansion Stage - You are heading up an established company and making a profit, and now you want to expand, perhaps internationally, perhaps by introducing new products

• Late Stage - You can safely call your business a success at this point, with its impressive sales figures, profit margin, and legion of employees, but now you want to output more, expand your marketing, and get bigger.

It goes without saying (yet we’re saying it) that you need to have clear goals and have no illusions about your company before approaching a VC. Know how much investment you are looking for, you growth strategy, how active a VC you want. Know your weak points.

With the basics out of the way, here are the steps your route to VC investment will take and the processes they will go through:

Business plan

You are not likely to get a meeting with a VC just by saying ‘hey, let’s have a meeting’. You’ll need to submit an executive summary and business plan for them to peruse and determine if you and they are a good fit. Depending on how much internal discussion is required and how many other proposals are being looked at, this may take a few weeks. As mentioned in one of our previous VC articles, having a mutual contact refer you and your business plan to the VC will probably get your business looked at first and will dramatically increase your odds of receiving the funding. Otherwise, less than 1% of those submitting a business plan will get all the way through to successful funding.

Don’t pester the VC, but don’t sit back and wait for them to get round to eventually contacting you. Follow up.

First meeting

If the VC likes the sound of your business, you will get your first meeting with them - or perhaps a phone call at first, followed by a meeting. This is where our previous articles (linked to in the intro) come in. This meeting is as much (if not more) about the VC getting to know you as a person and gauging you as a company leader as about discussing the details of your business. It is also your opportunity to find out from the VC things you weren’t able to uncover in your research into them. It is a two-way street.

Due diligence

Now the VC will start checking all the claims you have made, speaking to your clients and perhaps employees, specifically the management team, and looking in-depth at your business model, product, market potential, strategies, forecasts, etc. Expect anywhere from weeks to months of providing information to them.

Also, this may have been done before you even met, but expect the VC to check up on any previous ventures you have embarked upon. If you have a string of failed businesses in your wake, they will find out, and they probably won’t like it.

Term sheet

This is you standing on the cusp of that <1%. With everything satisfactory to the VC, they will give you a term sheet detailing the terms and conditions of the investment agreement, drafted with the information gathered during the previous stages. Be prepared to see the VC’s valuation of your company in the term sheet (both pre- and post-money), though it shouldn’t be too different from your own valuation if you have been honest with yourself.

At this point, the term sheet isn’t legally binding and can be negotiated. Negotiations will revolve around the VC’s return on investment and the amount of control they have, and if you have more than one VC interested in investing, you will have a stronger negotiating position.

Assuming you don’t mess up these negotiations (we’re rooting for you!), the term sheet will be agreed to by all applicable parties and then be converted into legal documents. Legal due diligence will now take place, so ensure your lawyers are prepared to answer questions. This will take about a month, and then…

Funding

You now have a VC investor and the funds are available. You also have an extra voice to pay attention to when it comes to decisions, but this is weighted against - other than the obvious money - the expertise and experience of the VC.

Go forth and do business! Until the next round of funding...

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Published on: 4th March 2017