What is the Venture Capital Funding Process?

The process for arranging financing will vary depending on the stage of investment and nature of the business. A common model of steps in a venture capital funding transaction includes:

Investor Review

• Review of the business plan by the potential investor;
  • Note: The business plan review step may be initiated by the entrepreneur or investor. Entrepreneurs often reach out early in the business life cycle seeking to garner interest in their business. Likewise, venture capitalists in search of portfolio companies frequently reach out to businesses to learn more about their operations. While this is often the first step in the process of securing equity investment, only a small percentage of business plans peek the interest of investors. Likewise, only a small percentage of VC inquiries to startups result in a funding deal.
     

Informational Interview

• An informational interview with the entrepreneur;
  • Note: The next step in the process is generally an informational interview where the investor can learn more about the business. This may be the time when the entrepreneurs delivers a copy of the business plan and delivers a presentation. This presentation will cover the major points in the business plan, but will cover important aspects of primary concern to the investor. See our Business Plans, Model, and Presentation material for more information.

Preliminary Negotiations

• Preliminary negotiations regarding the potential purchase of business equity;
  • Note: This may begin over informal back and forth via email, telephone, and in-person conversation. At this point, the parties are working to understand the business operations and arrive at a valuation for the business.

Term Sheet

• Creation of a finalized term sheet that outlines the major provisions of the proposed equity deal;
  • Note: The initial term sheet will generally cover the 10-12 major provisions of the equity funding deal. See our Deal Term Sheet Provisions for more information about this step.

Due Diligence

• A period for the conduct of due diligence by the equity investor;
  • Note: Due diligence is the stage where investors thoroughly investigate all aspects of business finances and operations to identify any inconsistencies in the representations of the entrepreneur and any risks not previously recognized.

Purchase Agreement

• The negotiation of the purchase agreement and collateral documents;
  • Note: After due diligence, the parties (or their agents) will sit down and work out the final terms of the financing agreement. They will memorialize the terms in a series of documents that effectuates the agreement. See our Series A Documents for more information.

Regulatory Filing

• Completion of necessary regulatory filings; and,
  • Note: The purchase or sale of securities (i.e., shares of stock) by a business entity is subject to state and federal securities laws. The federal securities regime requires either registration of the securities or the applicability of an exemption. Even with an exemption, the federal and state government may require an informational filing from the business. See our Securities Law series for more information.

Deal Closing

• Finally, the consummation of the deal and the exchange of equity for capital.
  • Note: The closing represents the exchange of capital and the transfer of an ownership interest. The closing of the equity financing may take place at one time, in multiple stages, or there may be a rolling closing.

Any of these steps may be absent or vary considerably in an individual funding deal; however, these steps provide a baseline for understanding the major actions that usually take place.