December 16, 2021

The Venture Capital Investment Process

Every new process or system we learn about in life can at first seem daunting. The idea of asking complete strangers for large sums of money is downright terrifying.  But once you understand the process inside and out and understand that you have something to offer, that it’s an exchange from which both parties benefit, the easier it will be for you to land funding.

Here’s our quick breakdown of the Venture Capital Investment Process, step-by-step.

Step 1: Traction first: Prove your business!

The proof can be shown in a number of ways; financial performance, a quality management team, LOIs/POs from larger companies, a large unpaid customer base that may be willing to pay for services, etc…VCs are looking for a number of these factors; what they search for specifically depends on the VC you are talking to. However, in general, most VCs look for the above-mentioned factors.

Here are some of the ways VCs measure traction:

  1. Proven management team: a team that has a track record of working in the industry for a decent amount of time as well as a significant edge compared to others in the same industry. Have the founders successfully built venture-scaled businesses in the past? If the answer is yes, the process will be easier.
  2. Financial performance: revenue numbers- ARR, MRR, COGS, marketing numbers such as CAC, LTV, and many more acronyms that can make your head spin. Showing quality growth and space to grow further using additional funds is crucial in passing the sniff test.
  3. LOIs/ POs: purchase orders or a letter of intents from larger corporations can always assist VCs in analyzing your customer pipeline in the case of B2B business models. Pipeline review is one of the most crucial aspects of a VC’s due diligence process. Also, expect VCs to speak with your customers in order to understand the value proposition of your product.
  4. Customer base/subscription list: B2C companies that rely on retail customers have to showcase their captive customer base as well as their willingness to pay for additional services; for example, think about how Dropbox, Facebook,or Google approach their businesses: they offer value-added services to highly-engaged free users.
Investment Plan on White Board

Step 2: Build your plan for how you’ll use the funding.

We can’t stress this enough: go in depth and show that you have a carefully considered plan that should deliver real results. Prove that you know what you’re doing here!

In-depth financial plans that show where you are putting the money, why, how much, when you’ll utilize the money, what you expect for an outcome, and most importantly, creating a document (Excel file) that provides a comprehensive overview of different scenarios and assumptions that back up your claim. VCs usually dig deep into these assumptions and projections and will validate if they are realizable. Make sure that these projections are not unrealistic; any future projections should be validated by a tried and true process. For example, if you plan to market your product through Facebook/Google ads, you should have already run experiments and found CAC(customer acquisitions costs) by channel, keywords, scalability of each channel, LTVs(lifetime values of customer), etc.

Most importantly, create a data room(shareable Dropbox folder) that includes incorporation documents, your most recent cap table, past financial information, and pro-forma/financial projections with use of funds. Also include Customer POs, patents [filed, provisional, and granted], founder and employee bios, executive summaries, your most recent pitch deck, and other relevant documents that could showcase your company. It is important to note that investors are not out to get you or copy your idea. However, I would be careful pitching to VCs that have your competitors in their portfolios because your information could easily be passed on to the competition. Only in such cases would I recommend pursuing an NDA; otherwise, it’s an annoyance for most VCs and most wouldn’t bother signing one.

Put your time into developing a strong plan. Imagine you were the investor; would you want to give a large amount of money to someone who was unsure what they would do with it? Keep fine-tuning your plan and adding to it until you feel comfortable sharing it with potential VC investors. If possible, ask your local VCs/advisors to review your information/deal room before soliciting funding.

Step 3: Pitch!

Creating a compelling pitch deck is an art. Following are a few essential elements that will catch every investor’s attention.

  1. Define the problem.
  2. How is your solution unique?
  3. What is the total addressable market? How did you arrive at that estimate?
  4. What have you done so far? (insert traction slides here, financials, metrics, dashboards, comments etc.)
  5. Create a video if possible; most VCs look at a lot of deals, and this might be the most efficient way for them to understand your company.
  6. Summarize financial projections and include crucial assumptions.
  7. Highlight major recent successes, customer pipeline, and current investors.
  8. Highlight team and advisors.
  9. Summarize use of funds.
  10. Include an Ask slide which will include terms of the round if you already have a lead investor.
  11. Include contact information.

It is especially helpful to have a warm referral from a fellow investor or other founders. If not, connect with VCs at networking events and send a quick follow-up with your pitch deck. Contact forms on VC websites are another great way that you can reach out to potential investors.


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