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.