The Venture Capital Process

March 13, 2023

By Graham McFarland, VAULT COO

Venture capital (VC) refers to a form of private equity financing in which investors provide capital to early-stage, high-potential companies in exchange for an ownership stake in the business. These investors are known as venture capitalists, and they typically invest in companies that have the potential for rapid growth and high returns on investment.

Venture capital is often provided to startup companies that are in their early stages of development and may not have access to traditional forms of financing, such as bank loans or public offerings of stock. These companies often have innovative business models or technologies, but may not yet have generated revenue or achieved profitability.

In exchange for their investment, venture capitalists typically receive an ownership stake in the company, as well as a say in how the company is run. They may also provide strategic guidance and operational support to help the company grow and succeed.

Venture capital is typically provided in a series of funding rounds, with each round providing additional capital as the company achieves specific milestones, such as product development or customer acquisition. The amount of funding provided by venture capitalists can vary widely, from a few hundred thousand dollars to tens of millions of dollars.

Venture capital investing is a high-risk, high-reward activity, with many investments failing to generate significant returns. However, successful investments can generate significant returns for both the venture capitalists and the companies in which they invest.

Defining the VC Process

  1. Get your executive summary read by a VC (goal is to get a phone meeting).
  2. Have a conference call or meet with the VC to go through the executive summary and answer questions (goal is to get a face to face presentation).
  3. If interested, the VC will present your venture at a partner’s meeting to get feedback and questions to help determine next steps.
  4. If the firm decides to move forward, they will invite you to present at their offices in front of a team, usually a couple of partners and support staff (goal is to get them to ask for the detail spreadsheet supporting your financial projections, as well as a current cap table).
  5. The VC will take your financials and run their own less optimistic plan B and plan C revenue scenarios based on your expense projections to determine risk and valuation. Before providing the detailed financial information if it is appropriate to execute a mutual non-disclosure agreement (NDA). (The goal is to get a term sheet from the VC for the investment.)
  6. If still interested, they will send you a term sheet that details specific terms of the investment such as valuation, board seats and preferences (let the negotiations begin!).
  7. Once the term sheet has been negotiated and signed, the investor will proceed with due diligence (goal is to not find any skeletons that would kill the deal or reduce the agreed upon valuation).
  8. Upon successful completion of due diligence, terms will be adjusted (if necessary) and investment documentation (purchase agreement, investor rights agreement, voting agreement and amendments to corporate bylaws will be drafted).
  9. Signatures, closing and wire transfer of funding.
  10. Celebrate! – now the hard work begins.

Investor Do’s

  • Be prepared and ready for every interaction, either on the phone or in person. Prepare, prepare and prepare again.
  • Be as transparent and open as you can be. You will lose credibility if the investor thinks you are not being open and honest.
  • Do label all of your presentation materials with the word “Confidential” to protect yourself even before you have an NDA in place.
  • Do send thank you correspondence after each meeting. This demonstrates how you treat other stakeholders such as customers and employees.
  • Do answer follow-up questions thoughtfully and quickly. Read each question multiple times to determine what the investor is looking for.
  • Before signing the term sheet, do ask the investor for at least three contacts of other CEO’s and/or founders that they have made investments. Call these references and ask how the negotiating process was handled and how they like working with the investor or firm following the investment.

At Vault Innovation, we’re more than just another custom software development company — we’re a partner in your success. We specialize in helping companies ideate, build, and develop technology solutions across multiple industries. For a decade we’ve solved design challenges, shipped purpose-driven products and software, and have successfully helped launch more than 60 tech companies. With a proven track record of results, VAULT uses technology to grow your business according to your specific goals. Expand your technology with confidence. Connect with our team today to schedule a no-obligation discovery session.
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