Investment processes across VCs vary but there are some underlying aspects that remain the same. When approaching any institutional investor, be it a VC fund or a Private Equity firm or any other type of investor, the process consists of the following.
1. Introduction and initial meetings
The investor and the company’s management make introductions and understand each other better. The VC makes a high-level assessment on whether an investment into this company matches the investment mandate of the VC fund. The investment mandate means the type of investments that are targeted by the VC fund. The company management in turn assesses if this VC fund is the type of investor that the company would like to engage with further and share confidential information.
2. Preliminary diligence
After the initial meetings, the VC fund conducts research to better understand the market, management, company products/services, shareholder profile, Intellectual Property, existing shareholder dynamics and potential returns. This stage involves multiple phone calls, meetings, and other interactions with the target company. VC Funds usually have an Investment Committee that comprises of senior management and may include external experts. After an approval from the Investment Committee, the VC Fund share a term sheet with the target company.
3. Term Sheet
The preliminary diligence usually is a 4-8-week process. Following this, the VC Fund offers a Term Sheet to the company management and shareholders. The term Sheet includes details on key aspects such as valuation, rights, investment amount and each party’s obligations. The document usually also assures the comfort that subject to a time period for diligence, the company will raise capital only from the VC Fund. The Term Sheet is then negotiated among the management, shareholders, and the VC fund. Usually, in a 2-4 week process, the Term Sheet is finalized and executed by all parties
4. Detailed diligence
The VC fund now conducts detailed diligence on the company’s profile and prospects. A signed term sheet now gives the VC Fund some comfort that it can spend on diligence by professional organizations. Diligence is conducted across financial, commercial, taxation and compliance related aspects. The VC Fund engages consulting firms that specialize in above areas to conduct appropriate diligence exercises. The diligence firms engage with the VC Fund and the target company to complete the exercise. This period takes 4-6 weeks
5. Documentation and closure
Towards the end of the Detailed diligence period, if the VC Fund believes that there is no finding in the diligence that can adversely change the assessment of the transaction, then work commences on the documentation. Before moving to the documentation stage, the VC Fund again seeks approval from the Investment Committee. After receiving approval, the VC Fund commences work along with its lawyers to prepare legal documentation. The company management and the VC Fund then negotiate and sign the documentation. After the documentation is executed, the VC Fund reaches out to its investors (that is, the Limited Partners) and ‘calls’ capital. This capital is then pooled and invested into the company.
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