What goes on inside a VC Firm?

This is how fundraising works.

The Intro: You make a connect with the Investor group – say a forum like your well known conference, and they say “What you are doing seems interesting, why dont we catch up?”

Follow Up: A few weeks later a meeting is scheduled and you meet to discuss a bit more information on what you do.

The First level Document: The meet is followed with the Associate asking for some details on slides, and you sending it across and that goes to and fro for a month or two.

The Internal First-Sell: The Associate then has to go convince the principal that there is a lead and to check for conflicts of interest (it comes up on their usual monday meets) and with a go ahead, will take some feedback and then come back to you with a few things that probably need clarification.

Taking You to the Boss: Once that is cleared, you might meet with the Principal and in some cases, the MD of the fund – depending on how the fund is structured. At some point there has to be buy-in from one of the partners for the deal to go through – uh uh, not to be funded, but to be presented in their scheduled investment meets – most firms have one once in three months.

The Roundtable: If you are in, they’ll invite you to come and do a presentation to the entire firm and the partners – the partner who did bring you in will side with you and expect all the others to drill you down. No deal goes forward without an unanimous Yes from everyone.

The Scrutiny: Once there is a YES, the due diligence process follows and for tech startups its two things – evaluating the technology and in bringing a financial firm to audit your finances. If you are a first time entrepreneur, do expect some referral calls, and also some calls to a few of your customers – in cases, even to your competitor

Parallel (Legalwork) : Before they do that they will sign an LOI (Letter of Intent) and with that you cannot talk to any other funds – its called the No Shop clause. You better at that time, start praying that the tech expert and auditor dont take much time.

The Deal: After which term sheet is issued, and then a few to and fro will happen on clauses, and finally at some point, someone will give in and agree.

Timeline: If you think all this will happen within six months, you are smoking some really good stuff

Its a wish, and honestly every investor tries, but no deal is so good that they can skip a few steps. Angels and small funds can do a lot of things and for the sake of getting enough deals (and accelerators can by virtue of their function), they might go ahead and write cheques and keep the legalities low, but if you are a first time entrepreneur, your safe guess is keep a six month runway. A lot has to do with the fact that investors are infact, investing someone else’s money and if they dont play by the rules and they later realize that the technology was completely copy pasted from the web, some partner is getting axed and this is such a small world that they’d never find a job anywhere else. Better safe than sorry is the rule.

My suggestion for entrepreneurs heading down the funding route, befriend an Investor way before you go ask him for money. The trust factor cuts down time in scrutinizing and getting to know you from scratch and can save a lot of time. Ofcourse if there is credible third party validation – Social proof, or the media talking about you and evidential revenue, things will move very quickly as well. But I’d presume that might not be the case for every early stage startup.