Navigating the funnel: a guide to our deal process

Following on from Jon’s post about how to set yourself up for fundraising success, in this next piece I’ll be digging into our deal process and funnel.

We often get asked by founders how our process works internally: how many deals we see and close in a year, how long a deal takes and what the best way to get in touch with us is. I’ll aim to cover all this off in this article and hopefully give some further insight into how we work with entrepreneurs throughout the deal process.

How can we find you and how do I get in touch?

First things first. We have a few channels that we use to find investments, which is probably typical of funds at our stage:

Outbound

1. We attend events, conferences, demo days and other industry events, across the UK, Ireland and Scandinavia. These can vary from large gatherings like a Saastock or Slush, to smaller more regular demo days or events at co-working spaces.
2. We leverage a few online tools as well as high-growth lists to track early-stage companies who have raised seed funding in the past 12–18 months. Our team filter through these and reach out to companies we believe meet our sector, geography and stage focus

Inbound

1. We receive introductions from other investors, founders, angels and advisors. We make it a priority to try to get to know lots of other investors, particularly those at an earlier stage to us (e.g. seed funds or angels), but also those at funds with a similar focus to ours.
2. We have an open submission form through our website where founders can tell us about their company and we will always respond to any enquiry that we receive through this

What does our process look like?

There are broadly six stages in our funnel, as you’ll see from the diagram below.

Stage 1 — First interaction

This is the number of companies we were in touch with last year, meaning companies where we received a deck or presentation, spoke on the phone or were similarly in touch with a founder. The drop-off in our funnel after this stage is really not as drastic as it looks! Remember that we see companies at various stages: some when they are in the middle of a fundraise processes, but the majority much earlier ahead of any fundraise needs. In our experience getting to know a founder and their company early on, well ahead of any funding needs, leads to a much better relationship and future fundraising process for both us and them. As a result, lots of the c.800 companies we see at this stage remain in our pool of ‘tracked’ companies and don’t progress down the funnel until they are at the appropriate stage to discuss fundraising.

Stage 2 — Face-to-face meeting

This stage more accurately a reflects the companies we see who are in the midst of a fundraising process. Typically, this is the first proper in-person conversation we have — and we will do >100 of them in a year. It gives founders the chance to tell us about their business and vision and gives us the opportunity to tell founders more about Smedvig. Regardless of who from Smedvig you meet at this stage, we discuss all first meetings with the whole team at our weekly meetings to make sure we develop a rounded view of each business. We think carefully about who we meet with, in an effort not to waste anyone’s time.

Stage 3 — Getting into the detail

About one third of the companies we meet will progress to the next stage. At this point we start doing a lot of the “heavy lifting” behind the scenes and work on validating the opportunity and building up a more detailed picture of the business. We work hard to ensure the effort at this stage falls on the Smedvig team to minimise the impact founders’ time. If founders have key data and metrics in good shape and ready to go we can get through this stage rapidly.

Stage 4 — Working towards an offer

Following this work, we will have a pretty good idea of whether it’s a deal for us, and again around a third of companies continue onto this point. At this stage we will be working towards making an offer. This is also a great time for founders to ask us any questions and to do their own diligence on us. We pride ourselves on being true to our word and encourage founders to speak to any of our portfolio companies (past and present!) to come to their own opinion about us.

Stage 5 — Term sheets

By this point we are getting ready to issue a term sheet. As part of this process we ask founders to come in and pitch in front of our senior team at the office (who are helpfully also the investment committee). It’s a great opportunity for founders to get to know the whole office, and importantly means all our team are up-to-speed with all our potential investments. We usually make about 5 offers in a year which is lower than many other funds in the industry but reflects our approach. We hold a small portfolio in order to make sure we can dedicate time to helping out the teams that we back. We also take our offers very seriously and do as much work as possible to get to them — this is reflected in our close rate (our accepted offer to close ratio is c.100%).

Stage 6 — Close

In this last phase it’s about agreeing the legals and doing a few confirmatory customer calls. Of the 5 term sheets we issue, we might close c.3. It’s a competitive market at the moment, so it’s our job to demonstrate our value-add through the deal process.

How long does the whole process take?

We get asked this question all the time, but there is no real right answer and really, it’s on a case by case basis. The numbers may give the impression there is a formal structure for every process, in truth, it’s much more fluid than that. In its most simple form if we met a company for the first time, they were at the right stage and there was a good fit, we could get to agreeing a term sheet in a fortnight.

However as we generally try to get to know companies ahead of when they are in a formal fundraise and build a relationship with them over time, companies often move in and out of our funnel from our ‘tracked pool’. Companies from this ‘tracked pool’ very often jump into the funnel at a much more advanced stage as we already know the business and the founder so well.

Any advice for navigating the funnel?

1. Engage Early

• We have mentioned this before, but we always look to engage early with companies. We like to get to know founders well in advance of fundraising so that a lot of the upfront work can be done in a relaxed way ahead of time. It also usually means that if we are still in discussion by the time a company comes around to fundraising, both sides already know it is a good fit and the process can run quickly and successfully.

2. Keep in regular contact

• We are always keen to hear updates on how the business is progressing — whether that’s an informal coffee or call, or through a monthly/quarterly newsletter that you send round highlighting key milestones. If you are too early for us we always try to make sure that you leave every interaction with us with an agreed set of next steps so that we make sure you can tell when best to re-engage with us.

3. Track relevant metrics and have the data to hand

• Even if revenue is at an early stage, we can get a good idea of how a business is progressing through other metrics — e.g. user growth, customer feedback scores, usage stats, total # buyers/sellers etc
• Keep a close eye on whatever KPIs are important to your business, and then be ready to share and discuss these whenever you catch up with VCs

Hopefully this has been of some use and shed some light on how our deal funnel works. The key principles we try to stick to are to make it open, honest, fair and as efficient as possible.

In the next post, Rob will be talking through getting in the door, and how to land that crucial first face to face meeting. Our series will then continue going further down the funnel and expand on how to navigate the offer and diligence stages.

If you have any questions or thoughts on the above, please comment below or get in touch directly — I’m available at pd@smedvigcapital.com