In this post, I will provide an overview of the 7 key steps of the deal process as a company progresses from first meeting to term sheet. This is an attempt at capturing a ‘typical’ process, but it may vary for each investment.
1. First meeting
This is a two-way discussion for us to get to know the company and for the founder(s) to get a sense of who we are and what we do.
Personally, in the first meeting I like to focus my questions on developing my understanding of the product and founder(s), particularly if it is an area that I have not looked at in detail before. The most common questions we get asked by founder(s) are around our fund size, sweet-spot cheque size, minimum revenue thresholds, annual deal volumes and sector focus.
Above all it is an opportunity to see if there is investor-founder fit, so these first meetings usually work best as relatively informal discussions.
2. Follow-up calls and research
Following the first meeting, the deal leads (typically a Partner + Associate) meet to share notes, align on what we know and don’t know, and try to pinpoint the key areas of the ‘investment thesis’ (jargon for “the reasons why we think it is a good investment”) that we need to analyse further at this stage. Prioritisation of our research is essential as there is an infinite amount of potential analysis that could be done.
We flesh out our understanding of the product and market through desk research and calls with contacts in our network who have a good understanding of the space. We often arrange a follow-up call with the founder(s) to discuss our questions and request company data such as P+Ls and customer cohorts (see my colleague Peter’s article on the typical analysis we do on unit economics for SaaS businesses).
3. First internal memo and team discussion
We produce a ~3-page summary of the opportunity, oddly referred to as a “one-pager” internally, which we circulate with the team a few days in advance of our weekly meeting first thing Monday morning. The document is structured around the Five Fundamentals that my colleague Joe Knowles discussed: product (differentiation, defensibility, strength of need — “vitamin or painkiller”), TAM, unit economics, traction and team.
The deal leads are quizzed extensively on the opportunity by the rest of our team (an experience which incentivizes you to prepare properly!). It is an efficient way of highlighting gaps in our understanding, and the feedback from this session helps guide the key areas on which we need to concentrate our analysis before we next speak as a team.
4. Meeting the wider team at the company
The deal leads will then spend approximately half a day at the office of the company to take a closer look at the product, meet key management across various functions, and have further discussions with the founder(s). I love this part as it gives you a glimpse of the company culture and we begin to form relationships with the wider team that we’ll be working with along the journey. If I leave the company’s office feeling that I would like to leave VC and join the company, that’s a great sign.
5. Customer calls
In addition, it is often useful to speak to a small number of customers at this stage. Amongst other things, customer calls are an invaluable way of assessing product-market fit, product differentiation, and strength of need. In an ideal world, we would be able to do customer calls as early as possible in the process, but this is not always practical for the company.
6. Second internal memo and comprehensive team discussion
Throughout the process we will have been honing our understanding of the company, gathering data, speaking to customers and experts, and doing analysis, all of which we use to flesh out a larger 6–10 page memo, the “multi-pager”, that we share internally and discuss during a standalone 1–2 hour session. We often include specific sub-sections dedicated to some of the key questions or concerns that members of our team have raised during the process. For the last multi-pager I wrote, this additional analysis involved unpicking the customer by customer drivers of revenue growth over the last twelve months and comparing the performance of the company to the wider market during COVID.
This internal discussion is thorough and often quite heated, but I think that’s healthy — unanimous agreement that the opportunity is a ‘slam dunk’ at the valuations in question would be more disconcerting.
7. IC presentation
Following the team discussion, we ask the founder(s) to come to our offices to present to the investment committee (“IC”). The IC is comprised of our five partners, one of whom would be leading the deal. The meeting usually involves a product demo, discussion around the key questions or risks that will impact the success of the business, and anything else that the founder(s) would like to share with the team.
8. Term sheet 😊
After the IC presentation we meet as a team and decide whether to make an offer. The offer is conditional upon all five partners reaching a consensus. We typically offer a term sheet within 24 hours of the IC presentation. The journey begins!
In our next piece ‘Valuing VCs’ we look at what you should value from a VC partnership and why it matters, as well as what diligence you should do on VCs to make sure the partnership is the right fit for you and your business.