Venture capital is ideal for early-stage tech companies that have already acquired some seed capital, but are too small for a public offering. By the time you approach venture capitalists, you will have a working product and business model, a user base and market validation, all of your patents and legal requirements in place, as well as past revenue, if not profit. The goal at this level of funding is scalability.
A venture capital firm is comprised of investors, analysts and industry experts with the purpose of operating on behalf of many individual investors. While each situation is different, the general pattern for approaching VCs is as follows:
An introduction is always the first step. This can happen in a variety of ways: by phone, email or in person. This depends on where and how you make contact with the VC.
The Pre-Meeting Workup
Once you have a meeting scheduled, you should send the VC firm your pitch deck, an executive summary or one-page business plan. You will be expected to show evidence of a model ready for rapid scaling. It’s not necessary to send your full business plan at this point.
What to Expect at the First Meeting
This will most likely take place with several representatives from the firm. The firm is responsible for the collective capital of all of its investors. The recipients of your pitch will be far more critical of your business model and past operations than at any of the rounds up to this point.
Following your presentation, the VC firm will have a partners’ meeting. The firm’s board will meet to review new companies up for consideration.
If your project goes further than the first partner meeting, more detailed information will be requested. If you have not done so yet, this is the opportunity to send your full business plan and supporting financial information. You will want to demonstrate your competency, so keep it tidy and professional.
The Face to Face
Once the firm reviews your project, the other partners will want to meet you to feel comfortable about the investment. There are numerous factors in evaluation, however it will come down to your potential to provide them a profitable exit. Know the numbers they expect and demonstrate your confidence in achieving them.
Additional Firm Meetings and Validation
The partners of the VC firm will want to hold a closed meeting again to decide on how they want to proceed with your project. The VC firm will look seriously into your company, investigate your data and study the technology. At this point they may draw up a term sheet with their general guidelines.
It’s in your best interest to have an attorney to look over your legal documents. Understand all of your obligations — VC is not only expensive in terms of equity. These negotiations may make or break your deal. Stay flexible, and be wary of dealings that don’t feel right. VCs end up owning about 15% — 20% of each portfolio company.1 So, make sure your buying the right new boss for your business.
Signing the Deal
While this IS an accomplishment, your work has only begun.
These are very busy people, handling lots of money. Be as prepared and concise in your dealings as possible and try not to get down if your business is not chosen. Learn as much as possible in the process.