In the shoes of a Venture Capitalist Investor!

Finding the right match between founders and a venture capitalist investor can sometimes be a long process. Some first time founders aim at keeping control of their company and avoid equity dilution as much as possible. As discussed in a previous article on bootstrapping, VC investors play a central role in the development of the company and should be seen as an external resource. For a founder, the question is when and how the capital should be open to private investors ? In this post, we want to give the possibility to entrepreneurs to put themselves in the shoes of a VC investor.

Role

The role of a venture capitalist investor (VCI)  is basically to invest in early stage companies where nobody else wants to enter. Because of an inherent high level of risk, their objective is to get high returns – ie IRR exceeding 40% – for every single deal. However, due to high failure rate, VC funds specialized in early stage investments rarely reach returns above 15 %. To ensure investment in startups are successful, VCI have elaborated over time their own methods to evaluate teams and business models. We propose to share a generic checklist that will help us understand what investors usually look at during a due diligence.

Checklist

The Project

Problem

  • Does the team solve a problem?

  • Pain level alleviated from customer,

Solutions

  • Is it innovative ?

  • How much does the product /service sell? (margins, selling price)?

  • Sales cycle, cash cycle, churn rate, CAC vs LTV,

  • How easily the business model can be copied ?

  • Are there any IP protection ?

The market

  • Is it a niche market or a mass market ?

  • Size of the market. How big is it?

  • How fast does the market grow?

  • Competition,

  • What are the regulatory and environmental risks?

The deal

  • How much money has to be invested?

  • What the funds will be used for?

  • How can the capital invested be preserved?

    • Majority / minority shareholdings

    • Valuation

    • Term sheet agreements

  • Are there other rounds foreseen in a near future?

The team

  • Why the team is the best to develop this idea?

  • Does the team know the industry?

  • Are they recognized by their peers in this same industry?

  • Do they have a previous experience in startup creation?

  • What is their management experience?

  • Above all, are they decent people with whom you would like to work on a daily basis?

The Exit

  • To whom can it be sold?

    • Privately: Buyouts to others VC Investors or PE,

    • Publicly: IPOs.

This non-exhaustive list stresses the complexity faced by investors when it comes to rate deal flows. These criteria could be considered as pieces of a puzzle that will interlock and would progressively give a holistic view of the company.

When Venture Capitalist Investor should get in?

Keeping the control and the ownership of a company at the same time can cause serious problems of governance and could impair the future of any organization. Founders should not be afraid to bring investors on board in order to benefit from their resources, experience and contacts. As suggested in recent studies, the average waiting time between a company creation and the series A approximates 39 months. During that period, entrepreneurs seem to follow a bootstrapping strategy not only to grow revenues and achieve higher valuations but also to validate their product market fit. Down the road, this validation will be much more appreciated by potential investor and will put the founding team in a better position to negotiate.

This article intends to help founders with no, or little, experience in fund raising to navigate the world of VC investors. For more information, don’t hesitate to get in touch with us.

By | 2017-10-21T22:59:36+02:00 octobre 20th, 2017|Articles Blog|0 Comments