How Venture Capitalists Make Decisions

by | Mar 15, 2021 | Business Excellence

A man in a suit stands on a balcony overlooking a city skyline, bright, illuminated wings and a glowing halo adorning him. In the background, a world map with financial data overlays the cityscape. The logo in the bottom right corner reads "Global Investment Strategies," hinting at venture capital opportunities.

A venture capitalist (VC) is a property investor who invests in high-growth firms in exchange for a share of the company’s ownership. Provide a general overview of the investment decision-making process utilized by VC (Venture Capital) firms to startup founders and early-stage enterprises.

This article lays up a general framework. The specifics of the procedure will vary depending on the VC firm, such as whether it is investing in pre-revenue companies or a $50 million revenue corporation. The startup seeking finance must understand the VC companies’ decision-making process before approaching them. Many VC firms make details about their methodology available on their websites.

How Venture Capitalists Make Decisions

Venture capitalists make decisions following an 8-step process.

1. Deals On Sourcing

  • The majority of the projects in which VCs invest are referred by people they know and trust.
  • Many venture capitalists are also actively looking for deals.
  • Some VCs scour the internet for startups using the software. InReach Ventures in Europe created a database of 95,000 businesses using bespoke software.
  • Startups can apply to VC companies directly.

2. Preliminary Screening

  • Most VC companies have a set of deal-killer criteria that they use to reject most proposals automatically.
  • On average, a VC will read a pitch deck for 3 minutes and 44 seconds.

3. Call Or Meeting With The Partner

  • Most VC companies will have a set of criteria in place to allow for a quick decision.
  • At this point, the most crucial decision is whether or whether a VC is interested in knowing more.

4. An Associate’s Quick Analysis

  • Follow up with the business regarding the partner’s issues.
  • Examine the startup’s pitch deck as well as its responses.
  • Examine the opposition.
  • Recommendation on whether to proceed or not.

5. A partner makes a due diligence decision

The partner determines that a large percentage of associate time will be dedicated to due diligence, which includes:

  • Customers are contacted for references.
  • Checking the founder’s references.
  • A thorough examination of the competition.
  • Using technical specialists to evaluate the solution
  • To validate revenues and costs, financial due diligence is required.
  • A recommendation on whether or not to proceed is written in an investment memo.

6. Meeting of partners

  • The investment memo is presented to the other partners by the partner who is funding the startup.
  • The partners decide whether or not to go through with the project. A VC firm’s decision-making process is unique. Therefore, it is sometimes necessary to reach a consensus.