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For years now, VCs have played a crucial role when it comes to financing high-growth companies and supporting the economy. Most of the giants like Apple, Alphabet, Amazon, Facebook, and others received support from VCs. If you are interested in Venture Capital for your project or company, it is important to know how these firms evaluate projects and make decisions to invest in Startups. As an entrepreneur, these small insights into their internal practices can help you to become better prepared and more efficient with raising capital.
Connecting with Deals
The very first thing that must be known about Venture Capital Firms is that their first step is all about generating a productive deal flow. In essence, they are hunting for projects. However, you may be surprised as to how they construct their deal flow. According to a survey of over 900 venture capitalists, more than 30% of deals come from leads from their former colleagues or acquaintances. Another 20% of deals come from referrals by other investors, and 8% come from referrals by existing portfolio companies. Interestingly, 30% of deals are produced through the research and outreach initiatives of the firm, and only 10% of the deals are generated from the email pitch decks received from interested companies seeking funding. Therefore, as you can see, Venture Capitalists look to mitigate risk and source most of their leads from their networks. As one might imagine, it will require a lot of work and patience to penetrate Venture Capitalists filters and firewalls. Research will be needed to try and infiltrate their trusted group of contacts… so start connecting with other entrepreneurs and investment circles to extend your reach. As you advance, it will be just as important to target Venture Capitalists where there is a historical record showing a more relevant fit for your project.
Due Diligence & Reducing the pool
Venture Capitalists then go through their Due Diligence process to narrow the amount of projects in their pool. These are usually small firms, and each investment professional spends about 55 hours a week on the job of which 22 hours per week are dedicated to networking and 18 hours working on supporting portfolio companies. During the Due Diligence process, the firm will exclude projects that ultimately do not meet their criteria, and will invite approximately 30% of screened companies to a meeting. Out of every 100 companies, 10 will be reviewed at a partner’s meeting, and 5 of those will more than likely proceed to the due diligence process. 2 initiatives will move on to negotiations and a single project will be closed according to statistics.
As part of the screening process, Venture Capitalists tend to pay keen attention to the entrepreneurial team, as well as the strategy and business model. The market and industry are also critical components of the decision rationale. However, the common stream of thought is that “We live and die by our founders!” Therefore, as a founder, you need to show experience, fortitude, resilience, passion, knowledge of the industry, and leadership.
A Venture Capitalist will not proceed with a weak leader that has buckling knees, and that does not have the desired industry experience or knowledge. The VCs look for passion in the founder!
Of course, the valuation of the company is also a top factor to consider but not as important as the founder or the team. The financials are not as critical as one may have thought. About 30% of VCs don’t even forecast company financials. Instead, VCs select companies based on their potential for big exits. Therefore, product and market potential are of greater importance, so with that said they tend to focus on return multiple as a better indicator of success. At the same time, we are long past the days of simply funding “ideas” or “concept”. VCs want to see viable markets and prefer revenue generating companies (although they will not necessarily exclude non-revenue generating initiatives).
Finalizing the Deal
A VC will structure a deal so that an entrepreneur with incentives to perform so they can be very successful upon achieving objectives. At the same time, the firm will protect itself and will want to take control of the company if the founder is failing. In order to accomplish this the VC will include in the term sheet a careful allocation of cash flow rights. In addition, there will more than probably be terms expected for board membership and voting rights, as well as for vesting and liquidation rights. If the terms are negotiated and accepted, then the VC will proceed to fund the company. Again… only 1% of companies reviewed tend to be funded.
One thing to expect is that the VC will become an active adviser of the company, and will interact with the company typically on a weekly basis as they try to add value to the company.
This assessment is pretty, straightforward. Most VC firms follow similar paths. Therefore, if you want to get funded by a VC, you better start dedicating a lot of time to networking! Find the right contacts and meet them. Learn from other entrepreneurs and penetrate their circles. Remember that you need a great product or service and a Serviceable Obtainable Market. Of course, be prepared and know your stuff! If you don’t have the mustard to be the face of the organization, find the right partner! The founding team needs to have the fortitude and resilience to push forward and the passion to convince the VC that they can count on you. Most importantly, and according to HBR, the winners are almost always the founders that can build “kick-ass” teams… so go out and build a great team!
Konzortia Capital is a FinTech consortium providing VC/PE deal-sourcing for Investors and funding opportunities for Start-Ups. As part of our value proposition, we promise to Source – Match – Exit. Konzortia provides deal sourcing through our Distributed Ledger Technologies (DLT) and Intellectual Property (IP). The recent acquisition of Paraforge allows Konzortia Capital to provide differentiated services and greater operational efficiency through its InvestHub platform for the needs of the Deal Flow sector.
Konzortia Capital’s solutions reduce risk for investors providing significant vetting thus eliminating much of the uncertainty of non-operational early-stage companies, combined with the assurance of market fit, but still within a very modest valuation giving investors the possibility of experiencing high growth.
InvestHub is Konzortia Capital’s platform for Source – Match – Exit. The platform leverages Paraforge, an applied learning artificial intelligence technology that perfectly marries large-volume data aggregation while[RA1] leveraging machine learning (ML) and artificial intelligence (AI) for investors sourcing deals and Start-Ups interested in raising capital and achieving liquidity sourcing.