Anatomy of a VC Investment: What to Expect in Your Fund Raise Process

This post was originally published on the Techstars Blog.

Fundraising is an important part of most entrepreneurial journeys. If you are an entrepreneur, the standard process followed by many venture capital firms is well worth knowing. While every case is unique, having an idea of the key stages means you will have a sense of where you really are, what you have achieved, and what is left to achieve in order to secure funding.

To keep this post as useful as possible, I have not written-up exactly how we do it at my own firm, but I have instead tried to break the process into eight stages that many firms will go through.

One: Pre-Raise

A good investor will know about you, your company and your market before you speak to them for the first time.

Good VCs track AppAnnie, Alexa, Linkedin, GitHub, ProductHunt and similar services to spot interesting companies and monitor trends. They also keep up to speed with highly-rated angel investors, syndicates, seed funds and incubators to ensure they hear about the companies and founders who are impressing the other investors they respect.

On the entrepreneur side of the conversation, you can start early too. While you have to build your product and company first, it is worth spending some of your time with investors, before you actually need or want to raise money.

A good investor takes time to understand your business, and you need time to get to know if they are the right person for you.

Two: Initiation of the Process

Depending on the situation, either the company or the investor can start fundraising process.

If you want to make the first move, you should ping a personal note to the investors that you already have a relationship with, signaling that you are thinking of raising money. For those you don’t know, avoid a cold email and either build a quick relationship (meet in person at an event, etc) or use your network (angel investors, employees, friends) to get warm introductions. I wouldn’t give a huge amount of information away via email too — it is always more powerful to give your ‘pitch’ in person or even over the phone.

Sometimes an investor who has been tracking a company closely (in some cases they are already an investor, in other cases, not) will pre-empt a fund raising process. Nakedly, this is because they are excited by your company and want to own part of it before it gets bigger or is better known. You need to decide if this aligns with your needs too.

Three: Early Process

If a VC is interested, a number of people at the firm will now get to know you. Expect to go through your deck two or three times as you meet a combination of Partners, Principals, Associates and Analysts. Be sure to know what each of these people do and how they will play into any final decision-making process.

During these meetings, you will be answering a lot of questions on your background, your team, and what the company and its products do. Be prepared for people to dig deep on the specific challenges that face your sector. If you run a delivery marketplace, you’ll be asked about unit economics; if you’ve built an advertising technology company, you need to know about what Google and Facebook are doing; and if you the CEO of an open core software company, you’ll be asked about your engagement with developers, and your conversation rate to premium software.

After you have run this gauntlet of questions, your answers will be reported back to the firm. An internal discussion, sometimes enhanced by external expert opinions, will take place. Ultimately this rolls up into a decision of whether they want to dig deeper.

Continue reading to see the remaining five processes.

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