The VC funding process - 12 steps to success

I get lots of questions about the VC funding process, how to be successful, why it takes so long, what to expect, etc. Rick Segal of JL Albright Ventures writes The Post Money Value blog and had an excellent post Inside the Process describing how it works at JLA. I was going to write a post on this but Rick did such a good job that I have little to add.

The first meeting is critical. I wrote "How to handle the first VC meeting" with tips from some of the top VCs on what they expect at the first meeting. Getting the first meeting is a process unto itself. Rick Segal is more open to taking first meetings than most VCs. My post above has a few tips on how to get the VC to take the first meeting.

The process is different at each VC firm but generally follows this pattern. I will just outline the steps. Read Rick's post for the details.

1. No harm - no foul 30 minute introduction. This can be done by phone, email, or in person. The goal is to get a full length first meeting.
2. Pre-meeting information package. Send an email with a 10 slide PowerPoint presentation and maybe a link to market sizing data.
3. The first meeting. Explain succinctly what problem you solve, who your customers are, how you will collect revenue, who your competitors are, and why your management team will be successful. Don't spend a lot of time on "how" the technology works. Save the demo for the end, if there is time. Again, read my post above, and Rick's post for more detail on how to handle the first meeting.
4. The Monday morning partners meeting. Most VC firms have a partners meeting on Monday morning to review their portfolio companies and new companies under consideration. Rick calls this "The Huddle". It is the first chance for the rest of the partners to veto the deal.
5. Send more information. Assuming you made it past the first partner test they will ask for more detailed information. Give them everything they ask for, and more. Make it organized and clearly address each point they raise. Don't send a generic package of materials. The VC will start to do some due diligence based on this information.
6. Face to Face meeting with more partners. You already have one partner championing the deal, but this is a partnership and everyone needs to feel comfortable with the investment. The other partners want to get a general understanding of the product, but more importantly get comfortable with you as a management team.
7. The second Monday morning partner meeting. Now that several partners have seen the company they will decide if they want to proceed with a term sheet, and the general parameters of a deal. Lots of deals die at this point.
8. The Term Sheet. Term sheets are pretty standard for VCs...they do them all the time. But for entrepreneurs these are scary, sometimes intimidating documents. There will be lots of legal terms and words you have never heard before. This is not a time to think you know it all. Get a good lawyer who has lots of experience with VC financing. Brad Feld has a series of great posts on term sheets. I highly recommend reading them. Some of these standard terms could come back to bite you later. You need to understand exactly what you are agreeing to. I recommend thinking up three scenarios and applying the terms to each of them to see what would happen. It may surprise you. Take the time to do it.
9. Due Diligence - Validation time. This is where the VC firm gets serious about investigating the company, the technology, the team, and the competition. This can can take a lot of time so be patient. You might think you have a deal "in the bag" when you get a term sheet, but this is just an outline of a deal. Negotiations start, the background checks start. Things can still fall apart.
10. Third Partner Meeting, they agree to move forward. Here the partners agree to do the deal, commit the money for lawyers, raise any concerns, etc.
11. The Lawyers. Lawyers can kill deals, or they can find creative ways to make deals happen. This can be a painful emotional process. Try to stay focused on the long term, bigger picture. Your lawyers job is to advise you of risks. You can decide to take the risk, but at least be aware of what they are.
12. Signing the deal. It has been a long process but you have made it. It can be somewhat anticlimactic after all the hard work, but it is time for celebration. Celebrate now. The real hard work is just beginning.

Sorry for the long post. It may only be interesting to first time entrepreneurs. But, let me tell you if you are going through this for the first time it is nerve wracking. Send a link to this post to any friends who are trying to navigate their way through the maze.

As I said earlier, every VC handles this slightly differently. There is a lot of detail and nuance behind every step. The deal can die at any step in the process. Try to have back up plans in place.

Good luck!

Comments

[Chris Pike]

"But, let me tell you if you are going through this for the first time it is nerve wracking."

This absolutely has to qualify in the top 5 of the "understatement of year" awards...

[Nik Cubrilovic]

We are at step 6-7 with some, at 1 with others. Handling 20 potential investors at once is a mission in itself (I have a good CRM - Salesforce).

Our service: http://www.omnidrive.com.au/

My weblog: http://www.nik.com.au

[James Smith]

It's funny, the press never mentions stuff like this. But then again, the sites/software companies they talk about are ridicliously popular.

Youtube, FaceBook, Winamp (bought out), Skype, All those big investments Draper Did, Google, etc..

I remember in one article, they talk about how draper had to force his way into becoming an investor with Facebook iirc.