Entrepreneurs should be aware of the defined process investors adopt when considering whether to invest in a new business venture.
This article examines the process through which investors vet whether or not to invest in a promising business venture. The purpose of this article is to provide entrepreneurs with insights into the investor perspective.
Deciding whether to invest capital in a new business takes time and often more than anticipated. The entire process from introduction to receiving a check can take between 3-6 months.
While undoubtably a challenge, entrepreneurs should work to become comfortable navigating the entire process to maintain a positive relationship with the interested investor(s) and their support teams.
Each investor and investment group employs a different process to vet investment opportunities, however the general ark follows this format:
Here we examine each step in closer detail so that entrepreneurs can be informed of what each investment stage represents.
From the perspective of the investor, screening represents the first time they interact with the entrepreneur. At this stage, appearances and interactions matter more than anything.
The quality of the pitch presentation and the responses of the entrepreneur to questions from investors about their new business venture can make or break securing a possible deal, and define the subsequent steps that take place.
Due Diligence represents the process through which investors determine the viability and potential of an investment opportunity. The Due Diligence stage can take the longest time to complete among the steps in the investment process.
Items including the proposed business solution, the leadership team, the financial model and economic projections, as well as the competitive environment and the execution road map are all examined closely by the investor(s).
Structuring The Deal:
Structuring the deal represents a period of negotiation between the investor(s) and the entrepreneurs and founding members of the business venture. If this stage is reached, entrepreneurs should be confident that the investor(s) desire to reach a deal.
However, business leaders should remain calm and examine all the information very closely within a proposed deal, and be comfortable making counter-offers.
Confidence is very important. Entrepreneurs should know which specific deal points they can/should stand firm on, as well as the areas they are comfortable conceding to the demands of the investors. Structuring a deal is a negotiation so the quality of communication and fostered trust is of the highest importance.
The Term Sheet represents all of the specific terms of agreement between the investor(s) and entrepreneur(s) after structuring the deal. The term sheet does not represent a contract, however it is a vital document that officially records all of the points where consensus is established between all of the involved parties.
The term sheet is a particularly useful tool if and when possible disagreements arise in the future. Entrepreneurs and investors alike can return to the term sheet to verify the points of agreement to clear confusion and solve disagreements.
Closing represents the creation and signing of an official contract. This can be a event of great excitement for both the entrepreneurs and the investors as it signals an event of significant change and future possibility.
At closing, the entrepreneurs can expect a signed check and the establishment of a defined relationship between the company's leadership team and the investor(s).
Monitoring the investment represents the practice employed by investors to oversee the progress of the business venture. Depending on the particular investor, venture capitalists will either be very hands on and heavily involved in the operations and strategy of the business venture, or hands off and more distant to the day-to-day company operations.
Entrepreneurs should have a good idea of what type of investor they are becoming professionally engaged with before striking a deal and signing documents. Moreover, it is important for each party to understand each other's perspective and position as the relationship matures over the course of the company's progression.
Exit represents the event of return on investment for the investor(s) and venture leadership. The event of Exit is when investors get their money back, plus the added economic value of their investment.
Generally exists are either M&A events or IPO events. M&A means the business venture either mergers or becomes acquired by another company. An IPO event means the business enters the public market, and offers stock in exchange for specific ownership rights.
It is essential that entrepreneurs have a perspective on their desired Exit event, and and understanding of what the investor group desires as an Exit event. To avoid possible controversy, it is paramount that the entrepreneurs and investors agree on appropriate Exit events as early as possible.
The exit event represents in many respects the end of the professional relationship between the investor(s) and the entrepreneurial team. Business leaders should work hard to maintain great relations with their investors throughout the entire life-cycle of their business venture. Doing so ensures that the Exit event runs smoothly and that all parties are satisfied with the outcome.
Maintaining positive relations also encourages investors to become interested in future business ventures lead by the same entrepreneurial team, or advocates of the business leaders capability to successfully lead and execute on a business plan.
To offer a better perspective of the process, the following graphic illustrates a more detailed time-line for the investment process, from screening to deal closing:
It is important that entrepreneurs recognize that the time-line can be greater or less than six weeks. Ultimately, it depends on how quickly the investment group works, and how comfortable the entrepreneurial team is throughout the process.
In most cases it will be invariably longer, however, the order of operations holds.
At each stage of the investment time-line are moments that hinge on the communication skills and strategy of the entrepreneur(s).
Always, spend the extra time reviewing official communications to make sure that they are clear, generally positive in tone, and representative of your intentions.
Even when negotiations break down and disagreements arise, entrepreneurs should remain level headed and unemotional. Maintaining a professional code of conduct will greatly increase the chance of arriving at an agreement, or of being introduced to other investment parties who could be more aligned with the vision and strategy of the venture's leadership team.
Closing a deal requires establishing a close relationship with investors, so take the time to get to know them.
Learn about who they are, their backgrounds, their business philosophy and practical approach to ventures. Entrepreneurs can find truly invaluable perspectives and wisdom from the investors they negotiate and work with.
It is important that entrepreneurs be conscious that engaged investors are not only there to provide economic support, but also emotional and strategic support. And, should they shy away from these additional responsibilities, entrepreneurs should be wary of their tangible value and viability as long-term partners.
In the end, early stage business leaders should take advantage of all the resources available to investors and always be thankful of their support and involvement.
Investors build bridges. Admire and use them! Don’t build or become a road-block!
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