Raising money when you are an early-stage startup might be challenging, and, let’s be honest, quite stressful. Hearing “no” from one investor after another can be distressing and disheartening, but remember this: odds are, you may get tons of “no’s”, before you get that much-awaited “yes”. Rejection is part of the process. Doing your homework and being prepared is crucial to fundraising success.

In this article, we will outline 6 key steps startups go through before the investment fund makes a final funding decision.

Inside the investor’s mind

A VC fund’s end goal is to increase the value of the startup, then profitably exit the investment by either selling its stake or via an initial public offering (IPO). There are four types of players in the venture capital industry:

  • Entrepreneurs who start companies and need funding to pursue their vision;
  • Investors who are willing to take on significant risk to pursue impressive returns (the risk is high, especially at the early stage);
  • Investment bankers who have financial services industry expertise, analytical prowess, and effective communication skills to support institutional clients in activities like capital raising and mergers and acquisitions;
  • Venture capitalists who profit by creating markets for entrepreneurs, investors, and bankers.

An investor’s decision-making is based on three main pillars:

  • Earning money;
  • Diversifying an investment portfolio;
  • Finding a strategic asset.

These are the questions investors need answers to: is this a growing market and technology? How fast will this company develop? Would we be proud to have this company in our portfolio? How open is the team to training and feedback? How will I exit from this deal? Will this require a lot of my time? Answers to these questions are important to forming the final investment decision. But let’s not get ahead of ourselves.

Step #1 Prescreening

Before you reach out to a potential investor, make sure to carefully read the list of metrics you need to present and the criteria you need to fulfill. In our case, for example, these are posted on the Vibranium.VC website. Overlooking this step is actually a common mistake new founders make. We covered it in our previous post (check out Mistake #4). Remember that prescreening is an analysis — the scout evaluates whether the startup is in the fund’s area of focus.

If your startup does not meet all the necessary criteria chances are high you will be recommended to work on your current metrics towards improvement and apply later. Getting a “no” from an investor is all part of the venture capital journey.

Before moving forward, it’s crucial to fix all the weak points flagged during the application process. Based on our experience, exceptions are rarely made — time is money in the investment community.

Step #2 Primary screening

A VC analyst evaluates the team, market, technology, and business model in line with the 6T methodology which consists of the following elements:

  • TEAM — an A-team that has a vision, passion, and necessary skills
  • TAM — a large, growing, accessible and strategic market
  • TECHNOLOGY — disruptive technology and/or a disruptive business model
  • TRACTION — customer, technical, market, or product validation
  • TRENDS — why now? Micro shifts that support the thesis
  • TERMS — does the investment fit us? Is there any hair on this deal?

Every fund has its own screening process, but almost everyone pays attention to the team, traction, and terms.

Step #3 Interview with an Investment Manager

The Investment Manager looks at the business model, the technology and the o market strategy. This is when the fund and the startup talk about various metrics: current revenue figures, customer acquisition cost, LTV, and so on. These numbers can better demonstrate how exactly the business model is functioning. The investment manager asks about the tech looks “under the hood” at the product frontend and backend, and checks the demo version. Generally, there are also a few questions related to PR & marketing strategy.

Step #4 Interview with the General Partner

The GP evaluates the market and the deal in question. He or she interviews founders about the team, the sales process, the current market situation, competitor’s advantages, current transaction parameters, deal structure l, and involvement of other parties. At this point, it is important to have a clear understanding of whether the startup already has a lead investor, and what investments they had before (if any). The fund also needs to know startup’s investment strategy regarding the next round and be able to visualize potential exit opportunities.

Step #5 Due diligence

Due diligence is a form of a comprehensive assessment that an investor carries out before proceeding with the deal.

Typically, funds first sign a term sheet, which details the main aspects of the transaction. After that, they go through with due diligence to ensure everything is in order with the company.

However, we at Vibranium.VC have our own approach to this process. We move forward with due diligence prior to making an investment decision so that we can have as much clarity on the startup as possible. That way, we can flag any potential risks in advance and discuss ways of fixing issues with the founders before actually negotiating the terms of the deal.

P.S. We will dive deeper into the due diligence process in our next post, so stay tuned!

Step #6 Investment Committee

An investment committee is a group of people responsible for managing an organization’s investments. The committee oversees investment policies, advisor selection, strategy, and fund performance to ensure the best possible outcome for members or beneficiaries.

The investment committee makes the final decision on whether to close a deal (= to invest in a startup), which is based on the outcomes of all of the previous steps.

The whole process from the moment you applied for investment until you got your final answer takes up to two months.