In Part 3 of this series, I discussed the complex issue of Deal Flow and why understanding this is important to the Entrepreneur. In this, Part 4, I want do address some of the issues relating to the investment process
Why is this important? Time kills deals. You need to take an active part in the process and ensure that your deal is properly project managed. In order to do this you need to understand the VC investment process.
In a VC firm there is always a small group of General Partners who make the investment decisions. In some firms this may be a single individual. He is easy to spot because he will typically be a high profile founder. More typically there will be up to half a dozen key individuals. Firstly you need to make sure that you have a General Partner who will “Champion” your deal with his colleagues. He needs to be 110% behind your deal and be willing and able to communicate this enthusiasm to his colleagues.
Secondly, you need to ensure that you do not have an “Anti-Champion” amongst the General Partners. At best he may be pushing his own deal against your deal in the competition for scare resources. At worst he may have concluded that you or your deal sucks and no matter what he will veto the investment by the firm. An important tip here is to ensure that every time you meet any General Partners in the firm you should be marketing to them and be on the look out for the General Partner who keeps raising difficult and negative questions. You will definitely need to spend time and effort winning him round.
VCs will have their own structure and process for managing their investment process. They will have Investment Committee meetings which will screen and approve continued involvement in your deal at various stages. You need to understand this process for each VC with whom you engage and get them to explain the stages and timetable behind this process. Once you have this information, you need to try to keep them to this process and timetable to keep the deal momentum.
As you go through the investment selection process you will need to present to the VCs at least twice – a management presentation and a full General Partners meeting. There will of course be a series of meetings to obtain and discuss information, to negotiate terms and to process due diligence information.
These meetings are important opportunities for you market your business to all the members of the firm. You need to understand the process so that you understand the purpose of the meetings and what key drivers are important to the VC. Look out particularly for any General Partners who seem luke warm to your business and work hard to build the support and enthusiasm of your General Partner “Champion”.
Due Diligence and Documentation
Once the VC has established in principle that the firms wants to make an investment in your company, the hard work starts. There will be a phase, normally six to eight weeks, of due diligence and documentation. Ensure that the VC takes you through their project management plan for this phase.
You will be required to make a considerable amount of information available to the VC and their legal, market and accounting advisers. Obtain this list in advance and start right away to prepare the information. Agree a timetable and specific (measurable and accountable) milestones for this that gets to a deal close by an agreed specific date. This timetable should be realistic but still timely.
At all times you need to keep a close eye on the prioritisation issues. Is the VC making you an important high priority investment. If meetings start getting delayed, document turnaround times slip or if more junior people start turning up for and running meetings you should be on amber alert. As mentioned above, time kills deals and you must keep pushing to keep the timetable on track and the VC focused on closing the deal.
Once the due diligence and documentation phase starts – after you have shaken hands on a deal and signed a non binding letter of intent (LOI) or heads of agreement – the VC will engage external advisers to work on the due diligence and documentation work. These lawyers and accountant (and other consultants) do not come cheap and the costs are down to the VC firm and not chargeable to their fund or investors. You will of course need to engage your own advisers. This investment is an indication of commitment on the part of the VC. Note that in the LOI, the VC may try to get you or your firm to underwrite their due diligence costs if the deal does not close. Consider whether you really want to do this.
In tomorrows post, I will take up a discussion around the Deal Structure.