VCs usually want to be, and are, actively involved with the companies that they invest in. It’s in both parties’ interests to help that company grow and mature so that it’s successful and profitable. This VC involvement can take several different forms but is at the very least, a seat on the company’s board of directors.
If you’ve ever wondered what the venture capital process looks like from the angle of a venture capitalist, then read on.
The types of businesses that typically approach a venture capitalist often fit into one or more of the scenarios below:
- Companies who are unable or unwilling to access traditional funding (from banks, public markets, etc.)
- Early stage companies
- High growth technology
- Ventures with high risk
- Investing in equity capital instead of straight debt
- Assuming higher risks in order to realize higher potential returns
- Young, emerging or high-growth companies
- Offering a longer window of time for repayment than a bank or traditional lender would
- Active involvement in aiding the company’s growth
First thing that falls to any company that needs funding is to identify several VCs that they see as a good fit. This means vetting venture capitalists and going out and meeting them. Once you have a short-list of companies to approach, you’ll need to set up meetings with them. Polish up that business plan and submit it for review: this will be critical in determining whether your business fits the fund’s investment criteria. Criteria are usually focused on:
- Region or geographic area
- A particular industry
- A particular stage of business development
If you’ve managed to get this far: good for you. It’s now time to leave things in the VC company’s hands and give them time to perform full due diligence. This phase can be a nerve-wracking time for those seeking investment funds, but it’s a critical part of doing business. The VC needs to vet the details on things such as your:
- operating history
- company performance
- financial statements
- the management team
- market and industry
- products and services
- corporate governance documents
Sometimes, during this process, a list of terms and conditions are created which define how the deal would operate should it be made.
When this due diligence is completed, your company will get a red or green light from the vetting VC. If it’s a green light, then the list of terms and conditions will be rolled out, refined and agreed upon. An investment is made in exchange for either debt or equity in your company. Whatever the deal is, it needs to be one that will offer the necessary money to the small business / start-up as well as minimizing potential risks for the venture capital fund.
Venture capital funds very often make cash investments in rounds; that is to say, they don’t give up the entire funding immediately, but do so in installments. These cash infusions are based on milestones that have been agreed upon in the terms and conditions phase. This is the way that venture capital plans are usually created and executed.
The timelines of funding vary, but any venture capitalist will have a good idea going into a deal what their exit strategy is to be. An average exit timeline may be four to six years after the initial funding was given. The lender’s goal is a superior return on investment (ROI) and this requires a solid end-point strategy.
How the exit strategy is executed varies as well. There may be an Initial Public Offering (IPO), there may be a merger or acquisition, etc. The invested venture fund may very well help a company exit by using their network of connections.
Mark Valentine is a VC with Q Capital.