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VC Backed IPO: Understanding Venture Capital Backed Companies

Kison Patel
CEO and Founder of DealRoom
Kison Patel
CEO and Founder of DealRoom

Many company founders are surprised by the detailed due diligence required when receiving venture capital funding.

DealRoom has worked with hundreds of companies looking to access venture capital funding over the past decade, enabling them to overcome some of these difficulties with workflows and project management tools.

In this article, we leverage some of this experience to look at VC-backed IPOs.

What is a Venture Capital-Backed Company?

A venture capital-backed company (also referred to as a ‘venture-backed company’) is a company whose equity is partly or wholly held by one or more venture capital (VC) firms. Although companies can technically receive investment from VC firms at any stage of their development, the investment usually happens early in their cycles, when cashflows are low or even negative.

Advantages of Being a VC-backed Company

  • There is an understanding  among VC investors that the company may not be cash flow positive, even in the mid-term.
  • Company founders can take advantage of the industry expertise and network of the VC firm, who typically include mentorship as part of their investment.
  • The company can quickly develop its own network, collaborating with other companies that the VC firm has invested in.
  • The company usually receives increased publicity as soon as the investment takes place, appearing on the VC firm’s website and several other channels.
  • In addition to mentoring, the VC firm will often provide the company it invests in with help hiring new talent, and raising funds.

Disadvantages of Being a VC-backed company

  • Because the company is usually a low revenue, high risk investment, company owners tend to have to give up equity at a lower valuation.
  • Management often, but not always, have to give up some control of their business strategy.
  • Funding is quite scarce, with VC firms typically looking through hundreds of pitch decks before investing in an individual company.
  • The due diligence for VC companies is significant.
  • Further rounds of funding for the firm may be complicated by warrants and conditions set by the VC firm.
Read Also: Guide to Venture Capital Due Diligence & How to Conduct It

Venture Capital Backed Company Example

The tentacles of VC firms continue to grow.

75% of the Fortune 100 companies have received VC funding of some form or another. At the beginning of the 21st century, the figure was closer to a third of all companies on the list.

A good example is the biggest of them all:

Google.

google venture capital backed company

Its founders, Larry Page and Sergei Brin, searched out VC investment at the end of the 1990s for their then new search engine.

They were funded to the tune of $25 million, handing over 33% of equity, and giving the company a $75million pre-money valuation.

They used this money to put together a team and to develop the technology further.

Those initial investors subsequently received a return of almost 3,500 times their investment, given that Google’s market capitalization is now hovering at around $257 billion

Venture Capital Backed IPO

Depending on where a company is in its cycle when receiving funding from the VC firm, a VC-based IPO usually happens as follows:

1. VC Funding

After several rounds of due diligence, the company receives VC funding, giving their company an optional valuation in the investment community, increased exposure, and (usually) a 5-year exit plan, detailing where they would like the company to be in terns of key metrics (revenue, income, user base, etc.) at the time of an IPO.

See Also: Venture Capital Fundraising Process in 8 Easy Steps [Guide]

2. Strategy

Between the investment and the IPO, the VC firm provides the company with mentorship, human capital, strategy advice, and possibly more cash - often provided at pre-agreed valuations which are favourable to the VC firm. The VC firm may also allow the company to bring in other investors before the IPO, and use the opportunity to liquidate some of their own investment.

3. Setting Milestones

In addition to setting turrets for the company, the VC firm will look to set milestones that make it more corporate. For example, putting in place an experienced CFO, improving the controls and reporting processes within the company, and introducing fully audited financial statements. Xero is great, but it’s not going to cut it if you’re going for IPO.

Related: How to Prepare for an IPO: A 6-Step Guide

4. Investment Banks

As the company moves to within 18 months of the target date for an IPO, together with the VC firm(s), it begins speaking with investment banks about the suitability for an IPO.

The investment banks will put together presentations, outlining why they should be the underwriter for the investment.

For example, when WeWork was preparing for its ill-fated IPO, Goldman Sachs put together a presentation with the unfortunate title: “Your path to $1 trillion.”

5. Market Trends

After the investment bank - or several investment banks have been chosen - they will then look at the market trends, have informal chats with colleagues in the industry (primarily private investors and investment funds that might be interested in the offering), gauging the interest at a certain price of stock for the company.

If the feedback is positive, the road to an IPO can began in earnest.

6. Due Diligence

At this point, due diligence process for the IPO begins.

This is probably the most arduous round of due diligence that any company will face over its lifetime, demanding that the company produce numerous documents, written statements, financial statements with notes explaining transactions at a level of detail that company owners are rarely accustomed to, and more.

To get a kick start and streamline the due diligence process, companies use IPO Due Diligence Playbooks.

See Also: Venture Capital Due Diligence Checklist - Useful Template
venture capital due diligence playbook

7. Setting Up the IPO Date

If the due diligence process is progressing well, the investment bank will sit down with the SEC, and the company owners and set a date for the IPO, usually within 12 months.

Assuming that all goes to plan - and the due diligence doesn’t throw up any unfortunate surprises - the VC-backed company can ‘go to market’ on the outlined date, allowing the VC firm to liquidate some of their stock, at a multiple several times their initial investment.

Venture Capital Backed IPO Management

As mentioned, the due diligence process in the venture capital-backed company’s road to IPO is especially intense.

The cost for most companies of publicly listing is invariably above $1 million, and a good proportion of this is in due diligence and the people involved inputting the pieces together.

In collaboration with several industry experts, and taking into account feedback received from VC-backed companies, DealRoom has put together what we believe to be the best due diligence software platform available for VC-backed companies to undertake this journey.

easy vc backed ipo due diligence management

Conclusion

The image of VC-backed companies as young, carefree entrepreneurs with a big vision is only partly true.

Beneath the hip exterior of all the companies that receive VC funding are well-oiled corporate operations.

This demands ongoing project management of the corporate kind and multiple rounds of due diligence to achieve the funding.

DealRoom has helped several companies achieve VC funding, enabling startup founders to differentiate themselves with a professional package to show investors.

Talk to us today about how DealRoom can help your company receive VC funding and put yourself on the road to an initial public offering.

pax8 IPO success story

Many company founders are surprised by the detailed due diligence required when receiving venture capital funding.

DealRoom has worked with hundreds of companies looking to access venture capital funding over the past decade, enabling them to overcome some of these difficulties with workflows and project management tools.

In this article, we leverage some of this experience to look at VC-backed IPOs.

What is a Venture Capital-Backed Company?

A venture capital-backed company (also referred to as a ‘venture-backed company’) is a company whose equity is partly or wholly held by one or more venture capital (VC) firms. Although companies can technically receive investment from VC firms at any stage of their development, the investment usually happens early in their cycles, when cashflows are low or even negative.

Advantages of Being a VC-backed Company

  • There is an understanding  among VC investors that the company may not be cash flow positive, even in the mid-term.
  • Company founders can take advantage of the industry expertise and network of the VC firm, who typically include mentorship as part of their investment.
  • The company can quickly develop its own network, collaborating with other companies that the VC firm has invested in.
  • The company usually receives increased publicity as soon as the investment takes place, appearing on the VC firm’s website and several other channels.
  • In addition to mentoring, the VC firm will often provide the company it invests in with help hiring new talent, and raising funds.

Disadvantages of Being a VC-backed company

  • Because the company is usually a low revenue, high risk investment, company owners tend to have to give up equity at a lower valuation.
  • Management often, but not always, have to give up some control of their business strategy.
  • Funding is quite scarce, with VC firms typically looking through hundreds of pitch decks before investing in an individual company.
  • The due diligence for VC companies is significant.
  • Further rounds of funding for the firm may be complicated by warrants and conditions set by the VC firm.
Read Also: Guide to Venture Capital Due Diligence & How to Conduct It

Venture Capital Backed Company Example

The tentacles of VC firms continue to grow.

75% of the Fortune 100 companies have received VC funding of some form or another. At the beginning of the 21st century, the figure was closer to a third of all companies on the list.

A good example is the biggest of them all:

Google.

google venture capital backed company

Its founders, Larry Page and Sergei Brin, searched out VC investment at the end of the 1990s for their then new search engine.

They were funded to the tune of $25 million, handing over 33% of equity, and giving the company a $75million pre-money valuation.

They used this money to put together a team and to develop the technology further.

Those initial investors subsequently received a return of almost 3,500 times their investment, given that Google’s market capitalization is now hovering at around $257 billion

Venture Capital Backed IPO

Depending on where a company is in its cycle when receiving funding from the VC firm, a VC-based IPO usually happens as follows:

1. VC Funding

After several rounds of due diligence, the company receives VC funding, giving their company an optional valuation in the investment community, increased exposure, and (usually) a 5-year exit plan, detailing where they would like the company to be in terns of key metrics (revenue, income, user base, etc.) at the time of an IPO.

See Also: Venture Capital Fundraising Process in 8 Easy Steps [Guide]

2. Strategy

Between the investment and the IPO, the VC firm provides the company with mentorship, human capital, strategy advice, and possibly more cash - often provided at pre-agreed valuations which are favourable to the VC firm. The VC firm may also allow the company to bring in other investors before the IPO, and use the opportunity to liquidate some of their own investment.

3. Setting Milestones

In addition to setting turrets for the company, the VC firm will look to set milestones that make it more corporate. For example, putting in place an experienced CFO, improving the controls and reporting processes within the company, and introducing fully audited financial statements. Xero is great, but it’s not going to cut it if you’re going for IPO.

Related: How to Prepare for an IPO: A 6-Step Guide

4. Investment Banks

As the company moves to within 18 months of the target date for an IPO, together with the VC firm(s), it begins speaking with investment banks about the suitability for an IPO.

The investment banks will put together presentations, outlining why they should be the underwriter for the investment.

For example, when WeWork was preparing for its ill-fated IPO, Goldman Sachs put together a presentation with the unfortunate title: “Your path to $1 trillion.”

5. Market Trends

After the investment bank - or several investment banks have been chosen - they will then look at the market trends, have informal chats with colleagues in the industry (primarily private investors and investment funds that might be interested in the offering), gauging the interest at a certain price of stock for the company.

If the feedback is positive, the road to an IPO can began in earnest.

6. Due Diligence

At this point, due diligence process for the IPO begins.

This is probably the most arduous round of due diligence that any company will face over its lifetime, demanding that the company produce numerous documents, written statements, financial statements with notes explaining transactions at a level of detail that company owners are rarely accustomed to, and more.

To get a kick start and streamline the due diligence process, companies use IPO Due Diligence Playbooks.

See Also: Venture Capital Due Diligence Checklist - Useful Template
venture capital due diligence playbook

7. Setting Up the IPO Date

If the due diligence process is progressing well, the investment bank will sit down with the SEC, and the company owners and set a date for the IPO, usually within 12 months.

Assuming that all goes to plan - and the due diligence doesn’t throw up any unfortunate surprises - the VC-backed company can ‘go to market’ on the outlined date, allowing the VC firm to liquidate some of their stock, at a multiple several times their initial investment.

Venture Capital Backed IPO Management

As mentioned, the due diligence process in the venture capital-backed company’s road to IPO is especially intense.

The cost for most companies of publicly listing is invariably above $1 million, and a good proportion of this is in due diligence and the people involved inputting the pieces together.

In collaboration with several industry experts, and taking into account feedback received from VC-backed companies, DealRoom has put together what we believe to be the best due diligence software platform available for VC-backed companies to undertake this journey.

easy vc backed ipo due diligence management

Conclusion

The image of VC-backed companies as young, carefree entrepreneurs with a big vision is only partly true.

Beneath the hip exterior of all the companies that receive VC funding are well-oiled corporate operations.

This demands ongoing project management of the corporate kind and multiple rounds of due diligence to achieve the funding.

DealRoom has helped several companies achieve VC funding, enabling startup founders to differentiate themselves with a professional package to show investors.

Talk to us today about how DealRoom can help your company receive VC funding and put yourself on the road to an initial public offering.

pax8 IPO success story

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