The Venture Capital Process
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The document outlines the venture capital investment process, focusing on criteria such as industry and stage focus, investment size, and target returns. It details strategies for deal sourcing, management, and exit, emphasizing the importance of traction and competitive advantages. Additionally, it describes the structure of a venture fund and emphasizes the need for diversified risk across industries and stages.
The Venture Capital Process
- 1. The Venture Capital Process By: J. Skyler Fernandes www.OneMatchVentures.com
- 2. Investment Criteria 2 • Industry Focus: Industry A, B, C • Stage Focus: Seed (X%), Series A (X%), Series B (X%), Series C+ (X%) • Investment Size: Seed: $250K-$500K, Series A: $500K-$1M (2x Seed), Series B: $1M- $2M (2x Series A), Series C: $3M-$6M (3x Series B) • Co-Investors: Top tier venture funds, seed funds, angel groups, and angels • Team: Relevant industry experience, serial entrepreneurs, and committed • Minimal Viable Product (MVP) = 100% complete and market tested • Traction: Revenue generating and/or verifiable traction, Min Revenue or EBITDA? • Competitive Advantages: Proprietary and/or unfair advantages that create sustainable competitive advantages • Capital Efficiency: Minimal capital needed for operations and execution • Target Ownership: 5%-25% • Target Returns: VCs: 5x-10x+ return potential, PE: 2-5x return Potential
- 3. Investment Strategy 3 • Markets: Large and evolving markets where disruptions are happening • Diversified Risk: Across a set of related industries and range of stages • Co-Invest: Mainly co-invest, rarely lead • Follow-on Capital: Require real traction or an exit on horizon • Exposure: No more than 10% of fund (or expected total investment capital) in any one company • Extract Value: Knowledge, talent, technology, and processes • Add Value: Help provide key resources, clients, employees, board members, advisors, strategic partners, investors, etc. • Versatility: Companies with multiple avenues for success • Involvement: Take board seats, observer roles, rarely if ever take board seats • Liquidity Potential: <5 Years • Things To Avoid: Regulatory risk, long sell cycles, capital / labor intensive, long tech development
- 4. Deal Sourcing 4 Deal Sourcing Ecosystems: Accelerators & Incubators Other Investors: VCs, Seed Funds, Angels, A ngel Groups Network: Employees, Clien ts & Partners Industry Leaders & Experts Proprietary Network: Rising Startups / Entrepreneurs Academic: Top Colleges / Universities Events: Startup / VC & Industry Focused Large Corporates: Tech Focused Corporations Best strategy for startups is get an intro to the fund, E-mails are not ideal (typically lower quality, non-vetted)
- 5. Deal Flow Management • Continually Rank & Weigh Deal Flow: In order of consideration – Market Opportunity: Target Market Size, Growth of Target Market, Penetration Needed – Team / Board Members / Advisors – Value Proposition: Product / Service, Problem vs. Solution – Business Model: Revenue / Expense Strategy, Financial Model – Traction / Milestones / Timeline – Stage (Risk): Startup (beta + pre-rev), early stage (beta + post-rev), growth stage, etc. – Competition: Direct / Indirect Competitors, Market Fit, Competitive Advantages – Terms: Investment Size, Note / Equity, Valuation (Ownership), etc. – Co-investors – Min Capital Needed: To achieve breakeven? Before an exit? – Value Add Potential: Knowledge, Employees / Board Members, Clients, Partners, etc. – Exit Opportunities: Who?, Why?, When? 5 Note: Traction is one of the highest weighed factors in deal flow management for VCs, and often becomes the determining factor when compared to equally great teams, business opportunities, and deal terms, etc.
- 6. Process: Source Learn Invest Exit 6 Exit Management Focus on Winners, Not Losers Monitor, Support, Follow-Ons Reporting & Oversight Term-Sheet & Investment Execution 5-10 Investments / Yr (1-3%) Final Due Diligence Investment Committee: Go (50%, 5-10 Companies / Yr) 2nd Level Due Diligence Investment Committee: Go (50%, 10-20) / No Go (50%, 10-20) Preliminary Due Diligence Go (50%, 20-40) / No Go (50%, 20-40) Initial Screening & Elimination 40-80 Companies / Yr (20%) Extensive Deal Sourcing 200-400 Companies / Yr Source Learn Invest Exit Sign NDA if needed
- 7. Venture Fund Structure 7 Venture Fund Management LLC (GPs) Venture A LLC Venture B LLC Venture C LLC Investors (LPs) Portfolio Co. A Portfolio Co. B Portfolio Co. C Profit Sharing (Carry): 80% = LPs 20% = GPs Mgmt Fee: 2% $ Invested $ Invested $ Invested Liquidity Event