How does a venture capital firm screen deals?

Understanding the Selection Process With Investors

Venture capitalists mitigate the risk of venture investing by developing a portfolio of companies in a single venture fund. They invest in a small percentage of the business plans that get placed and reviewed at their firms. When considering an investment, they carefully screen the technical and business merits of the deal before them.

Jesse Reyes, vice president for Thompson Venture Economics, a New York-based venture capital research firm, says, “The key to this new environment, though, is that the venture investors can afford to be choosy about what deals they do, and they’re exercising that right.” Therefore, the selection process can be quite comprehensive.

How A Venture Capital Firm Screens Its Deals

1. Placement of Completed Business Plan, through appropriate “warm” referrals.

2. Quickview and Routing, the plan is directed to the most appropriate reviewer based on partner’s domain expertise.

3. Business Plan Review, one or more partners will review the plan and evaluate it based on a number of factors related to the firm’s current area of focus. Based on the outcome of the review process, the entrepreneur will be contacted and informed of the next steps.

4. Informal Dialogue, whereby additional details are requested from the entrepreneur through email and phone calls. If there is significant interest, the entrepreneur and team will be invited to present before the firm’s investment professionals.

5. Initial Pre-Screening Meeting, much like an interview process, provides opportunity for the interested partners to be introduced to the entrepreneur and team and see them in action with the presentation. They discuss the next steps in the funding process, and how the firm can assist the entrepreneur and team.

6. Informal Due Diligence, a step for pre-investment analysis, typically it can be conducted in about a week but sometimes takes as much as three weeks. The investment committee, which is made up of all the partners in the firm, reviews and discusses the due diligence that has been conducted up to that point.

7. Formal Presentation, if a decision is made to continue, they will ask the entrepreneur to formally present before senior partners. After the presentation, the investment committee would then make a decision whether or not to make an offer for investment.

8. Investment Decision, during the initial phase of either the informal and/or formal due diligence process, the investors will present and finalize details of a “Term Sheet.” The Term Sheet will outline the general attributes of the relationship between the entrepreneur and the VC firm.

9. Formal Due Diligence, a full firm-wide effort is applied to the in-depth investment review process. Generally, one of the partners will take the lead in this extensive analysis. This process includes additional reference checks of the entrepreneur and team, dialogue with industry and customer references, and interviews with independent subject matter experts.

10. Closing Documents, a collaborative effort between the attorneys of the venture firm and the entrepreneur that will define the legal framework relationship between the venture and the investors.

11. Investment, provided that all reach an agreement, the VC then provides the funding and the two parties begin working together and creating sustainable value.

SOURCE: Roadmap To Entrepreneurial Success