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VC Investing process


Venture capital Investments have more than doubled in the September quarter despite the pandemic led disruptions. India continues to be an attractive market for VC investors. Have you ever wondered how the entire VC investing process happens?


Entrepreneurs require funds for implementation of their innovative startup ideas which they arrange through bootstrapping from their relatives and families, angel investments, private equity investments and Venture capital funds. The idea which qualifies all the required stages of approval from investors gets assistance through investments. Investment rounds can also be classified into Series A, Series B, Series C and so on.


The selection of the investment decision is considered important for both investors as well as entrepreneurs. The presentation of the proposal in front of investors marks the first step to the VC investing process.


Let’s now talk about the VC investing process in detail. It is regarded as a dual process requiring assessment by the entrepreneur regarding the appropriate VC firm he should contact for assistance including the terms and conditions involved related to the investment decisions as well as assessment by the investors regarding investment proposal and decision. Investors usually spend an average of 3 minutes looking at the pitch decks and only those ideas qualify which fulfill their investment criteria including the revenue projections, the industry, risk involved and investment required.


It is important for investors to be aware of the eligibility criteria to apply for the VC investing process. The first requirement is quite obvious, the venture must be technically feasible. The idea should have viability and integrity for commercial production. Secondly, there must be adequate reason to believe that there will be demand for the product, It is important for entrepreneurs to realize that if you are solving a problem that exists for the public at large and not just for yourself, that is what is required and would eventually succeed if executed effectively.


Next, the Founder and the competence of the team plays a major role in investment decisions. If the investor thinks that the entrepreneur has managerial abilities and technical competence to execute the idea, then only the assistance will be provided. Similarly, other factors such as the ability to sustain long term competitive advantage, future prospects. Availability of inputs and legality of the proposal creates a difference while selecting the appropriate idea for investment. Before reaching out to investors and VC firms, entrepreneurs should ensure that the above checkboxes are ticked.


Now the question arises how an entrepreneur should choose a VC firm fulfilling their requirements. Firstly, the entrepreneur should assess the attitude and approach of the VC firm. Some investors even offer value added services known as “investment nurturing” to the entrepreneurs they provide assistance to. Other factors to consider are the terms and conditions and their implications, exit policy, past history of investment decisions, availability of funds, rate of interest, additional charges, etc.


After initial analysis of the idea and its feasibility and once an entrepreneur fulfills the eligibility criteria, VC firms begin on further analysing the business idea and its implications through following steps:


Fundamental Analysis: This technique is used by VC firms to assess and foresee the fundamental aspects of the proposed business including the product and its features, quality of management, past history of the business if any and degree of risk and competition.


Financial Analysis: it is undertaken to assess the performance of the business including cash flow generation , future growth, EBITDA and revenue margins, future expected value of the company and time lag between investment and return (payback period). Since VC investing is a risky process, financial analysis is an important factor to consider investment decisions.


Portfolio Analysis: Here the present portfolio, the feasibility of future portfolio, assessing size, location and industry proposal is a step to portfolio analysis.


Divestment Analysis: Under this technique, investors assess the exit opportunities, the timing, the valuation upon divestment for the startup being provided assistance to. VC firms can divest their interest or they have the following investment options available:

  1. Liquidation

  2. IPO/ Floatation method

  3. Puts and call method

  4. Earn out

  5. Take out

  6. Trade sale

After this step, the stage of financing is discussed. Financing is generally divided into two stages, early and later stage financing including seed capital, startup capital, , second round finance, development capital, expansion finance, replacement capital, turnarounds, MBOs (Management Buy-outs), Mezzanine financing, etc. The VC firms can provide equity, conditional loans, convertible loans and Income notes based on their detailed analysis and investment decisions.


To know more about the stage of financing, stay tuned this week.

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