26
Jun
08

Simple guide to an investment process

The capital raising process for a company from investors was a process that was quite unclear for me and I’ve certainly acquired more knowledge about it during my internship at Intellecap. So here’s a rough outline of the process for the rest of us.

Venture capital investment 101

1. Finding investors:

Typically companies contact investment banks or consultancies to guide them through the entire deal. The role of the investment bank is to represent the ‘sell-side’. The bank will create a ‘flyer’ of sorts to pitch the company to their network of investors consisting of PE firms, VCs, other banks, etc. The difference between the investors is in the kind of value theyll bring to the company. Large organizations rasing money do not need strategic management support, while small companies do. So VCs are commonly contacted for small companies rasing their first few rounds of investment. While PE funds who just provide the capital are contacted for more mature companies.

If a few interested investors are found, then its time to

2. Send them an executive summary:

But before that legal contracts to prevent disclosure of information or bypassing of the investment bank are signed. If you found the investor yourself, then an NDA won’t be signed probably.

The executive summary contains more details of the company and also about the sector. The summary has more numbers, details about the management team, product, etc. The summary could range from 15-30 pages. Here normally the entrepreneur makes a few pitches to convince investors.

The investors estimate the risks, valuation and the stake they might get. If it fits into their needs they’ll give the green signal for the next stage.

3. Business plan shared and valuation done:

The easy part is now over. The longest period of time is now ahead. The business plan can be prepared by the company and then rectified by the investment bank or completely built by the investment bank. The business plan consists of every single detail about the company including financial models, legal documents, etc. It is of utmost importance to have a genuine business plan with valid assumptions and acceptable estimations because all the lies and unacceptable numbers will come out in ‘due diligence’.

Using the business plan and financial models provided to the investor, the investor and the investment bank make ‘valuation models’ independently. The model uses a few estimations and assumtions to come with a number that estimates the worth of a company.

4. Negotiations and term sheet:

All the parties involved in the process come to the negotiating table. The valuation figures are shared without exposing the valuation models to have negotiating leverage. Negotiations over the valuation, stake, business plan, etc are held. Everything that an investor is worried about are discussed.

If the buy-side and sell-side parties are satisfied with the conclusions of the negotiations, a term-sheet is made (I’ve not experienced this or seen this stage, so I have a faint idea only). The term-sheet contains all the terms agreed upon, the clauses that allow exiting the investment, the division of shares, the kind of shares (preferential, non-voting, etc), etc.

5. Due diligence:

This is the longest process of the whole deal. After the term sheet has been signed, due diligence is begun. Due diligence(DD) is the process of checking the details provided in the business plan by the company. So there’s legal DD, tecnology DD, operations DD, organization DD, etc. This is done by the buy-side by either hiring a firm or doing it themselves. This is a very expensive and long process so it is kept till the end. The process can take time ranging from a few months to one year.

At the end of DD the report is prepared. If there a few discrepancies they can be overlooked or negotiated on or sometimes the deal is canceled.

6. Money comes in:

If the DD report satisfies the investors the deal is inked and money is transferred. All the terms agreed upon in the term-sheet are now in place. Congratulations!

In the whole process you can choose not to involve an investment bank or consultancy and do the whole process yourself. Its just always easier to get the experts involved.

———————————————–

So that’s the process of investment. A little more wisdom that I’ve heard from VCs, investment bankers.

1. Avoid looking for equity based capital for as long as possible.

2. The process is very time consuming so don’t hunt for capital when your company needs attention.

3. Take money only when you really don’t need it. i.e. when the company is doing well and not desperate for capital

4. Getting investment is not really always good news since you’ve given a lot of control to other parties. You might end up making no money in an exit if you do not have preferential shares or voting rights.

Hope this information helps some of you! I’ve tried to be as accurate as possible, but there are no steadfast rules.

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5 Responses to “Simple guide to an investment process”


  1. June 26, 2008 at 5:39 pm

    Hmm… interesting. Is this mode of working same regardless of the kind of startup? (social; or otherwise?).

    And yeah; just a side thought: wondering how many other interesting blog posts I must have missed because I rejected them to as too long!

  2. 2 Abhishek
    June 26, 2008 at 5:57 pm

    Nobody really invests in non-profits (if that is what you mean by social). But if you are a for-profit trying to solve a social development issue, then the only difference is in the kind of investors you’ll attract. For-profit social ventures are often really small, so the risk is high and capital requirements, low.
    The process will probably still be the same.

  3. June 28, 2008 at 2:25 am

    Certainly an eye-opener 🙂

  4. 4 Anonymous
    June 30, 2008 at 9:05 pm

    cool dude~!
    Hey have you got any tips or infomation about things like y-combinator?
    Any info will be much appreciated.

  5. 5 Louella
    September 20, 2014 at 10:13 am

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