So you’re thinking about applying for VC funding. Here’s exactly what happens when a Venture Capitalist first gets your business plan and the decision process leading to whether they invest in you or not.
Your Plan Is Reviewed
Your Business plan is screened against the VC’s specific investment criteria. This could be tech, creative, service orientated and so on. Before submitting a plan to a VC, carry out your own due diligence to see if they invest in your particular industry.
Typically comprises of a desktop search and a couple of phone calls. If the plan is aligned with the investment criteria then initial light investigation takes place. Google yourself, your co-founders and your company to see what comes up. Be sure to cleanse your linkedin and facebook accounts of anything unsavory. Have your website and online corporate history aligned to what your potential backer will want to see.
Meetings with the VC
There can be up to three or more meetings. The first will be an exploratory meeting usually with a senior member of the VC team but not a partner. It will be light but it’s purpose is to dig a little deeper into the business and gauge to see if personalities click. The 2nd Meeting will comprise of a deeper look into the business where the VC will want to meet more, if not all the core team members behind the business. The 3rd Meeting will usually include the presence of a Partner in the VC firm who has the power to make the decision to invest.
Negotiation of a Term Sheet
this document will cover the core terms of the investment to include the amount to be invested, the equity share required by the VC and any material conditions under which the finds are being invested (for example the retention of a particular person or the company’s entitlement to intellectual property or software rights). You may want to get your own advisers on board at this point.
Formal Due Diligence
This is where the VC’s solicitors will look deep into the company. The investigation will include matters such as legal structure, corporate constitution, ownership of Intellectual property rights, Latent tax liabilities and compliance history and so on. The process is comprehensive and can take between 4 and 8 weeks. If you have been tempted to tell any porky pies then this is where you get found out so resist !
An Investment contract is drawn up to reflect the Term Sheet and the results of any due diligence (you will need your own lawyers for this). the document is signed and once any precondition are satisfied the initial funds are released.