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Understanding the venture capital process: the four stages


Let’s talk stats for a minute…

Venture capital (VC) investing has remained around the 12 year average for the last five years and 2014’s forecast is looking strong. Investing continues at a steady speed and fairly constant dollar amount per investment. It’s worth noting that the market correction in consumer and enterprise stocks in February 2014  was pretty significant, reducing their values by 25 and 40 per cent respectively. As such, institutional investors have cycled from growth to value stocks. Although valuations might be more diverse, total capital invested in start-ups still remains the same. Additionally, VCs in Q1 and Q2 of 2014 alone have raised nearly as much capital as all of 2013. Based on this, 2014 could be the biggest year for venture capital since 2001 when around $38B was raised (according to the NVCA)

So it’s safe to say that venture capital is not only alive and well, but booming. With that in mind how can a VC firm batten down the hatches for the upcoming storm of start-ups blowing down their doors? Well, one small step could be to get onboard an enterprise collaboration platform to help streamline the communicative and administrative elements of such a transaction. Let’s take a look at the venture capital process to see how this could work.

1. Screening

The first stage is screening – first contact if you will. This is when the first call or meeting between the venture capital firm’s management and the start-up firm’s management occurs. A bit like political dignitaries meeting for the first time. The beginning of the process where pleasantries are made, business cards are exchanged and top dogs gets to know one another.

From an enterprise collaboration point of view this would be inviting participants to access the online collaboration portal. Within the portal, members can begin to talk to one another using public message boards and private messaging, learn about each other using personal bios, brainstorm using wikis, share knowledge using blogs, arrange meetings using an events module and meet deadlines using a tasks module.

Additionally, the VC firm will be assessing risk, market size and industry to determine it if the opportunity falls within their business objectives. A good collaboration platform will offer secure file sharing and analytics tools to assist with such assessments. Only around 15 per cent of deals ever progress past this first screening stage, so the odds are against both the VC and the start-up. Enterprise collaboration may tip the odds in a slightly more favourable direction.

2. Socialisation

The next stage is socialisation – really just a ramping up of the previous stage. The first contact teams from either side are excited at the new prospect and want to share their experience with other less senior members of the firm, perhaps associates and executives. This stage has more meeting and pitches with more people and larger audiences. This is where enterprise collaboration really shines, as it will seamlessly integrate as many people into the system as necessary and let them partake in the deal. Again, only around 15 per cent of deals go to the next stage, so enlisting the services of technology could be invaluable.

3. Diligence

The third step is diligence. The VC’s deal team begins to thoroughly research the investment opportunity and share their findings with the wider partnership. Research areas includes evaluating the team, the market, product roadmap and sales pipeline. Additionally, the VC firm will quietly get in touch with people from the industry to get referrals and anecdotal evidence. Also, there will be questions and answers going back and forth between the VC and the start-up to nail down all the facts.

Enterprise collaboration can help do all of the above with style and grace. Firstly a spreadsheet/database module will automate parts of the due diligence process with pre-configured checklists that prevent duplication of information, syntax errors and erroneous facts being submitted. Secure file sharing, wikis and blogs will allow research to be shared with groups and/or individuals within the VC firm. The advanced permissioning function means that the VC can discreetly invite third parties into the portal to fact find and gain references, while restricting the start-up firm’s visibility of it (essentially creating ethical walls). Finally, the advanced Q&A module will structure and streamline the volley of questions and answers. Only around 10 per cent of deals progress past this stage, so speed and efficiency delivered by technology is critical.

4. Decision

Finally is stage four – the decision. This when the VC partners meet, having been briefed on the diligence information, key questions and investment terms. The start-up founders pitch the VC partnership before they go away to decide. If they like the opportunity and want to invest, all that’s left is to convince the start-up founders to sign the term sheet and enter into a partnership. The rest of the transaction can be completed within the collaboration platform, not to mention creating new work streams post-deal. Around six per cent complete stage four and actually secure an investment.

When you add it all up, the odds of a venture capital deal succeeding are incredibly low. Why not contact us or request a demo to see how HighQ’s range of transaction management solutions can help you tilt the odds a little more in your favour.

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