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8 Stages of a Venture Capital Fundraising Process

Kison Patel
CEO and Founder of DealRoom & M&A Science
Kison Patel
CEO and Founder of DealRoom & M&A Science

Venture capital finance is nuanced in ways that other types of business funding are not.

These differences touch on areas such as the funding structures, the level of input into company strategy from the investors, and even whether a mentorship is envisioned.

Funding, although undoubtedly the most important component, is just one of the considerations for startup founders when deciding among VC investors.

We at FirmRoom help dozens of companies with fundraising and in this article, we look at how the fundraising process generally tends to play out, across 8 steps. So let's dive into how to raise venture capital money.

VC Fundraising Process Steps

  1. Ensuring readiness for venture capital
  2. Getting the word out
  3. Developing the pitch deck
  4. Choosing investors
  5. Early stage Meetings
  6. Late stage Meetings
  7. Term sheet
  8. Post- Term Sheet Due Diligence and Closing

Before we start read also our article about 7 Crucial Steps to Take Before a VC Fundraising Round.

1. Ensuring readiness for venture capital

When beginning the VC fundraising process, a good maxim to remember is the old Steve Martin line:

“be so good that they can’t ignore you.”

This is another way of saying - make sure the business is ready, commercially viable, and preferably scalable, before approaching VC investors.

By ‘ready’, we mean that it’s important to have a minimal viable product (MVP). Your sales to date should also show a trajectory that’s impossible for investors to ignore.

If you’re in an online subscriptions business, bring your churn down.

In short, whatever your business, remember the maxim.

As part of your company’s efforts to ensure readiness, open and maintain conversations with as many VC funders as possible. Attend workshops and events.

At this stage, the dialogue shouldn’t be led by the need for funding, but rather to be part of the startup ecosystem.

They may send you interesting material, introduce you to relevant contacts, or inform you of developments in your part of the industry - for example, funding of competitors - that may have passed you by.

Above all, keeping your company’s name at the top of investors’ minds is a strategy that will pay dividends later on.

What is a minimal viable product?

A minimum viable product (often referred to as to by its initials, ‘MVP’) with just enough features to introduce the product’s core value proposition to customers.

The idea behind the MVP is to bring the product to market, test it with early users, allowing them to sample its benefits and to provide feedback for later versions.

An example of an MV would be a currency transfer service with 2-3 transfers available (say US dollars, Euro, and Mexican pesos). A more extensive range of currencies would be added after the MVP’s release. 

minimum viable product

2. Getting the word out

If your company has an MVP that has generated positive feedback, you’ve hit most or all of the targets you set out at the beginning of your journey (such as revenue, customer churn, hiring, etc.) and your cash is running short, it’s time to begin the fundraising process in earnest.

The first step is to touch base with those investors that you should have maintained contact with.

Tell them that you’re beginning the fundraising process and whether they know anyone in the market, them included, that might be interested.

They will almost certainly ask about your sales figures and to see a pitch deck, even if they’re only casually interested, leading us to step 3.

3. Developing the pitch deck

investor pitch deck

The first thing to say about pitch decks is that there are hundreds of pitch decks from well-known firms that raised millions of dollars readily available online.

A quick Google search will lead you to the pitch decks used by firms such as Uber, Airbnb, WeWork, and others.

Whatever the merits of these companies, their pitch decks enabled them to achieve funding and that should be the goal of the startup founder. Remember that you don’t need to reinvent the wheel with a pitch deck.

The medium is not the message. Your focus should be communicating well what your company does. If your company addresses a problem better than others, your pitch deck should tell people how.

4. Choosing investors

It pays to be somewhat selective when looking at investors, rather than using a scattergun approach.

Look for VC firms that operate in your niche or that have made investments in companies similar to your own. Don’t send boilerplate emails.

Take time to craft a personalized email to each company whereby you outline (briefly) why you think your company is a match for their funds.

The best ways to find these investors are through sites like TechCrunch, AngelList, Crunchbase, and even LinkedIn.

Most will ask for a pitch deck after you’ve made your initial introduction, so make sure that it’s ready before reaching this stage of the process.

A quick note on sharing the pitch deck

Assuming that you speak to several venture capital funds, your pitch deck is likely to evolve quickly from now on.

Certain slides will change, others will disappear, and different ones will be added, as investors’ feedback is taken on board.

In short, you’re going to be left in no time with several versions of the document, and probably several versions of your company’s financial model as well.

This is where a virtual data room comes into its own, ensuring that your process is organized, and well managed.

A good data room will also allow you to keep track of your drafts and which investors have seen each version, adding considerable value to the process.

Read also: Why Modern Startups Use Data Rooms for Fundraising

data room

5. Early stage Meetings

Early stage meetings typically run similar to job interviews that most people will be familiar with.

You’ll be asked questions on your background and those of your team, what drove you to found the company that you did, where you see yourself in five years’ time, etc.

Don’t be discouraged if these initial meetings are carried out by a VC analyst or associate.

Usually, the partners don’t become involved until a later stage of the process (see below). Use the opportunity to ask some questions of the venture capital company as well.

Ask them if there’s anything they would change in the deck and where they see the challenges and opportunities.

6. Late stage Meetings

Again, like the traditional job interview process, the next stage will involve one or all of the partners of the VC firm.

There will be more than one meeting, and you can expect to be grilled on every aspect of the company and its competitive environment. This is the main juncture where you can express what your hopes and expectations are.

Be forthright about the areas where you’d like help - on the technological side, or bringing the business to scale, for example.

Be careful to gauge what the partners are saying to you and how well you gel with them - they’re going to become part of your business, so it’s extremely important that you’re comfortable with them.

7. Term sheet

If the round of meetings with the partners went well, the next step is to receive a term sheet.

As the name implies, the term sheet is a document that outlines the terms of the venture capital firm’s investment: their valuation of your company, the equity stake they’re paying for as part of that investment, the finer details of those terms (for example, extra payments contingent on growth), and the rights and responsibilities of both parties to the deal, outside of mere financing.

These tend to be brief, rarely running to more than two or three pages. When both sides to the deal have signed, the only thing that remains is to do the post-term sheet due diligence.

8. Post- Term Sheet Due Diligence and Closing

venture capital due diligence playbook

Given that startups tend to be smaller and less complex than the companies involved in private equity, it follows that the due diligence process is less demanding.

In fact, assuming you were honest in your dealings with the VC firm, this stage should represent little more than a formality and is usually wrapped in a couple of weeks.

The VC firm brings in their technology expert, lawyers and accountants to ensure that everything is above board and that closing can begin.

For closing to occur, the VC firm and your company sign an extended document, with more detail than that of the term sheet, essentially rubber stamping the investment, and concluding your fundraising process.

Conclusion

Despite its reputation as a rebellious industry where technology geeks throw money at good ideas between games of ping pong, the venture capital industry is now a highly structured and even institutional segment of the investment industry.

This demands that startup founders take a suitable approach.

Make a plan of how and when you intend to conduct the fundraising process to maximize your company’s chances of raising the capital that it needs. 

firmroom

Venture capital finance is nuanced in ways that other types of business funding are not.

These differences touch on areas such as the funding structures, the level of input into company strategy from the investors, and even whether a mentorship is envisioned.

Funding, although undoubtedly the most important component, is just one of the considerations for startup founders when deciding among VC investors.

We at FirmRoom help dozens of companies with fundraising and in this article, we look at how the fundraising process generally tends to play out, across 8 steps. So let's dive into how to raise venture capital money.

VC Fundraising Process Steps

  1. Ensuring readiness for venture capital
  2. Getting the word out
  3. Developing the pitch deck
  4. Choosing investors
  5. Early stage Meetings
  6. Late stage Meetings
  7. Term sheet
  8. Post- Term Sheet Due Diligence and Closing

Before we start read also our article about 7 Crucial Steps to Take Before a VC Fundraising Round.

1. Ensuring readiness for venture capital

When beginning the VC fundraising process, a good maxim to remember is the old Steve Martin line:

“be so good that they can’t ignore you.”

This is another way of saying - make sure the business is ready, commercially viable, and preferably scalable, before approaching VC investors.

By ‘ready’, we mean that it’s important to have a minimal viable product (MVP). Your sales to date should also show a trajectory that’s impossible for investors to ignore.

If you’re in an online subscriptions business, bring your churn down.

In short, whatever your business, remember the maxim.

As part of your company’s efforts to ensure readiness, open and maintain conversations with as many VC funders as possible. Attend workshops and events.

At this stage, the dialogue shouldn’t be led by the need for funding, but rather to be part of the startup ecosystem.

They may send you interesting material, introduce you to relevant contacts, or inform you of developments in your part of the industry - for example, funding of competitors - that may have passed you by.

Above all, keeping your company’s name at the top of investors’ minds is a strategy that will pay dividends later on.

What is a minimal viable product?

A minimum viable product (often referred to as to by its initials, ‘MVP’) with just enough features to introduce the product’s core value proposition to customers.

The idea behind the MVP is to bring the product to market, test it with early users, allowing them to sample its benefits and to provide feedback for later versions.

An example of an MV would be a currency transfer service with 2-3 transfers available (say US dollars, Euro, and Mexican pesos). A more extensive range of currencies would be added after the MVP’s release. 

minimum viable product

2. Getting the word out

If your company has an MVP that has generated positive feedback, you’ve hit most or all of the targets you set out at the beginning of your journey (such as revenue, customer churn, hiring, etc.) and your cash is running short, it’s time to begin the fundraising process in earnest.

The first step is to touch base with those investors that you should have maintained contact with.

Tell them that you’re beginning the fundraising process and whether they know anyone in the market, them included, that might be interested.

They will almost certainly ask about your sales figures and to see a pitch deck, even if they’re only casually interested, leading us to step 3.

3. Developing the pitch deck

investor pitch deck

The first thing to say about pitch decks is that there are hundreds of pitch decks from well-known firms that raised millions of dollars readily available online.

A quick Google search will lead you to the pitch decks used by firms such as Uber, Airbnb, WeWork, and others.

Whatever the merits of these companies, their pitch decks enabled them to achieve funding and that should be the goal of the startup founder. Remember that you don’t need to reinvent the wheel with a pitch deck.

The medium is not the message. Your focus should be communicating well what your company does. If your company addresses a problem better than others, your pitch deck should tell people how.

4. Choosing investors

It pays to be somewhat selective when looking at investors, rather than using a scattergun approach.

Look for VC firms that operate in your niche or that have made investments in companies similar to your own. Don’t send boilerplate emails.

Take time to craft a personalized email to each company whereby you outline (briefly) why you think your company is a match for their funds.

The best ways to find these investors are through sites like TechCrunch, AngelList, Crunchbase, and even LinkedIn.

Most will ask for a pitch deck after you’ve made your initial introduction, so make sure that it’s ready before reaching this stage of the process.

A quick note on sharing the pitch deck

Assuming that you speak to several venture capital funds, your pitch deck is likely to evolve quickly from now on.

Certain slides will change, others will disappear, and different ones will be added, as investors’ feedback is taken on board.

In short, you’re going to be left in no time with several versions of the document, and probably several versions of your company’s financial model as well.

This is where a virtual data room comes into its own, ensuring that your process is organized, and well managed.

A good data room will also allow you to keep track of your drafts and which investors have seen each version, adding considerable value to the process.

Read also: Why Modern Startups Use Data Rooms for Fundraising

data room

5. Early stage Meetings

Early stage meetings typically run similar to job interviews that most people will be familiar with.

You’ll be asked questions on your background and those of your team, what drove you to found the company that you did, where you see yourself in five years’ time, etc.

Don’t be discouraged if these initial meetings are carried out by a VC analyst or associate.

Usually, the partners don’t become involved until a later stage of the process (see below). Use the opportunity to ask some questions of the venture capital company as well.

Ask them if there’s anything they would change in the deck and where they see the challenges and opportunities.

6. Late stage Meetings

Again, like the traditional job interview process, the next stage will involve one or all of the partners of the VC firm.

There will be more than one meeting, and you can expect to be grilled on every aspect of the company and its competitive environment. This is the main juncture where you can express what your hopes and expectations are.

Be forthright about the areas where you’d like help - on the technological side, or bringing the business to scale, for example.

Be careful to gauge what the partners are saying to you and how well you gel with them - they’re going to become part of your business, so it’s extremely important that you’re comfortable with them.

7. Term sheet

If the round of meetings with the partners went well, the next step is to receive a term sheet.

As the name implies, the term sheet is a document that outlines the terms of the venture capital firm’s investment: their valuation of your company, the equity stake they’re paying for as part of that investment, the finer details of those terms (for example, extra payments contingent on growth), and the rights and responsibilities of both parties to the deal, outside of mere financing.

These tend to be brief, rarely running to more than two or three pages. When both sides to the deal have signed, the only thing that remains is to do the post-term sheet due diligence.

8. Post- Term Sheet Due Diligence and Closing

venture capital due diligence playbook

Given that startups tend to be smaller and less complex than the companies involved in private equity, it follows that the due diligence process is less demanding.

In fact, assuming you were honest in your dealings with the VC firm, this stage should represent little more than a formality and is usually wrapped in a couple of weeks.

The VC firm brings in their technology expert, lawyers and accountants to ensure that everything is above board and that closing can begin.

For closing to occur, the VC firm and your company sign an extended document, with more detail than that of the term sheet, essentially rubber stamping the investment, and concluding your fundraising process.

Conclusion

Despite its reputation as a rebellious industry where technology geeks throw money at good ideas between games of ping pong, the venture capital industry is now a highly structured and even institutional segment of the investment industry.

This demands that startup founders take a suitable approach.

Make a plan of how and when you intend to conduct the fundraising process to maximize your company’s chances of raising the capital that it needs. 

firmroom

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