Although we are primarily Series-A investors (where a startup has found a Market-Product fit with some revenue with good growth rates), it helps startups trying to raise Seed capital if we share our insider views on how early-stage Seed deals usually take place in Silicon Valley. We would like to help interesting startups early on that could turn out to be our potential S-A investments later. Early-stage capital raise process itself can be opaque and leave fledgling startups/founders wondering when they can get a decision if early-stage VCs will invest in their startup or not. Below is an overview of a standard process for Seed funds in the Valley and what a startup can expect at each stage.
Stage 1: Initial Quick Chat (VC Internal Sentiment: Let me see what these guys are up to)
This first meeting is an introduction between the VC and the founder(s). The goal is to find out if your company is worth exploring further for investment.
VC’s Goal: A Seed stage VC is looking for a stellar team first. The startup product is not proven and a startup at this stage is raising capital to fine tune Market-Product fit with Seed money. VC is looking to founders to demonstrate how the team can/will beat the odds and dominate a massive market (which should be validated). For a $750K-$1M Seed investment, most Seed VCs will expect a minimum of $5K/month in revenue to start with exciting growth of 10%+ per month, or equivalents depending upon if it is an Enterprise B2B startup or B2C consumer startup.
Implications to Founders: These early quick chat meetings are usually casual and sometimes scheduled outside of an office setting, such as a coffee shop or restaurants. Rest assured the VC must have carried out a bunch quick chats the same day, they can be all over the place. It is up to founders to keep their attention on the pitch with the help of a deck. Founders should never take a quick chat w/o a deck assuming it is a – quick chat. We think it will be a waste of time for both parties as VC will not remember the startup. If the VC gets interested, they will often follow up within one business day to discuss more. But a commitment is far away.
Stage 2: Consensus Building (VC Internal Sentiment: Let us examine how strong the play is)
Early-stage VC will then socialize the startup and you may get a few calls to discuss. The goal for the meeting will be to build consensus with a few of their colleagues early on as no early-stage VC can get all the initial read at once. VC wants to make sure that she did not miss anything obvious before investing more time of the VC firm to investigate further.
VC Goal: The VC is hoping that founders will get their colleagues excited as well as, extrapolating your recent growth to a long-term company building vision. Founders must provide insightful answers to the core questions raised by the VC colleagues. The usual top four questions on the minds are Market Opportunity, Typical Customer and Willingness-to-Pay (WTP), GTM/Customer Acquisition, Competitive Advantage. These are probing questions for all early-stage VCs and founders must discuss thoughtfully without becoming defensive. This must be an All-Hands-Are-On-Deck type discussion even if the VC has not invested yet.
Implications to Founders: These meetings are usually done at startup office or the VC’s, and at least one other investor from the VC firm will join. Founders must expect this meeting to be a much closer examination of startup’s strengths and weaknesses, as the attendees have typically reviewed your deck and discussed the opportunity amongst themselves in advance. If your product is publicly available, they will have tried it and you should expect questions on the experience.
Stage 3: Partner Decision Meeting (VC Internal Sentiment: Is it a go? Shall we invest?)
This is the VC’s decision moment with a goal to have all colleagues agree to offer an investment terms (Valuation, Amount etc.).
VC Goal: This will be the most formal meeting of the process and will include all available members of the investment team, which could be a group of up to 10 people. The VC will need a high level of excitement from the investment team, with a majority in favor of investing to proceed at this point. The original sponsoring VC already wants to invest but wants to have colleagues on board. No VC wants to break from his heard and play solo as building a company is a long game.
Implications to Founders: The investment team will have access to startup materials, and, for a few, this may be their first time meeting the founders. So, founders can expect a wide array of questions, often reviewing answers they have given previously. Founders must give clear and detailed responses to the investment team’s core questions, even if they sound repetitive as everybody is confirming all aspects one more time. Any newly raised issues should be addressed promptly so a final decision can be made without further delay. Founders may also be asked about the round’s other participants at this point and where this VC fits in, i.e., how much capital could they invest? If things go well, the VC will ordinarily let you know the same day.
Stage 4: Legal & Financial Diligence (VC Internal Sentiment: Any red lags? All looks good?)
This is the verification stage or due diligence stage that mostly include formalities to check startup formation documents, founder background checks, finances, IPs etc. The VC wants to verify the entity they are investing in, is the same one you pitched.
VC Goal: The VC is expecting no surprises, ideally everything she understood from founder’s pitch is exactly what she will find during diligence. A rapidly growing startup may have some room for updates, but significant surprises can kill the investment. The VC expects pragmatism and maturity from founders to negotiate terms and get the investment closed ASAP.
Implications to Founders: Founders and rest of the startup team should be prepared to provide financial and legal documentation as needed. Many VCs will want to validate your customer contracts and/or other major agreements. Some VCs may ask for a background check to verify founder credentials. If the round is priced (not a note or a SAFE), startup lawyers will co-ordinate with the VC’s lawyers on documentation where standard questions will arise on how to handle existing investors, employees, or the future equity option pool.
VC investment process can be tough but knowing where you are in each stage of the discussion will give the fundraising a much better chance of success.
/Service Ventures Team
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