Seed Fundraising — The 4 Stages of a VC Process
The venture capital (“VC”) meeting process can be opaque and leave you wondering when you’ll get a decision on if they’ll invest in your company or not. Here’s an overview of the standard process for seed funds (in Silicon Valley) and what you should expect at each stage.
Stage 1 — Initial Filtering
This first meeting is an introduction between the VC and yourself. Their goal is to find out if your company is worth exploring further for investment.
What to expect: These meetings are usually casual and sometimes scheduled outside of an office setting, such as a coffee shop or members club (e.g. Philz Coffee). Because investors like to talk, it’s up to you to focus their attention on your pitch; and always use your deck if you can. If the VC is interested, they will often follow up within one business day, but remember, no matter how positive they sound at this stage, a commitment is not imminent.
What the VC is looking for: At the seed stage, VCs are looking for a sensational team first. You must demonstrate how your team will beat the odds and dominate a massive market. If you’re looking for a $1M+ investment, most VCs will expect a minimum of $5K/month in revenue to start. Next, the expectation will be exciting growth of 10%+ per month on that revenue, or equivalents such as customers or daily active users.
Stage 2 — Socialization
Now the VC is socializing your company. Their goal for the meeting is to build consensus with a few of their colleagues.
What to expect: Meetings are usually done at your office or the VC’s, and at least one other investor from the VC firm will join. Expect this meeting to be a much closer examination of your company’s strengths and weaknesses, as the attendees have typically reviewed your deck and discussed the opportunity amongst themselves in advance. If your product is publicly available, they will have tried it and you should expect questions on the experience.
What the VC is looking for: The VC is hoping you will get their colleagues just as excited as they are, connecting your recent growth to a long term vision. Strong answers to the core questions raised by the VC are imperative, e.g. market opportunity, customer acquisition, competitive advantage. They will also want to see that you are willing to answer probing questions, and debate thoughtfully if needed; resist any temptation to become defensive.
Stage 3 — Partner Meeting
This is the VC’s decision time. Their goal is to have their colleagues agree to offer you investment terms.
What to expect: This will be the most formal meeting of the process and will include all available members of the investment team, which could be a group of up to 10 people. Expect a wide array of questions, often reviewing answers you’ve given previously. Remember that the group will have access to your materials and, for some, this will be their first time meeting you. You may also be asked about the round’s participants and where this VC fits in, i.e. how much capital could they invest? If things go well, the VC will ordinarily let you know the same day.
What the VC is looking for: The VC will need a high level of excitement from the investment team, with a majority in favor of investing to proceed at this point. Remember, your VC contact already wants to invest, but is not likely to dissent from their colleagues. Be sure to give clear and detailed responses to the firm’s core questions (usually repeated multiple times by this stage) and any newly raised issues, so a final decision can be made without further delay.
Stage 4 — Legal & Diligence
This is the verification stage, often called “diligence”. The VC wants to verify the company they’re investing in, is the same one you pitched.
What to expect: Be prepared to provide financial and legal documentation for your company. Many VCs will also want to validate your customer contracts and/or other major agreements. Some VCs (including myself) ask for a background check to verify founder credentials. If the round is priced (not a note or a SAFE), your lawyers will work with the VC’s lawyers on documentation where standard questions will arise on how to handle existing investors, employees, or the future equity option pool.
What VC is looking for: The VC is expecting no surprises — ideally everything they understood from your pitch is exactly what they find during diligence. A rapidly growing company may have some room for variance but significant differences can kill the investment and be extremely negative for the company reputationally. The VC will want to see pragmatism and poise from you, to negotiate terms and get the investment closed ASAP.
Enduring the VC meeting process can be tough, but knowing where you are in each stage will give your fundraising a much better chance of success.
This article is part of a series on Seed Fundraising.
1. When to Raise Money
2. How to Build a Deck
3. VCs vs. Seed Funds vs. Angels
4. How to Get a Meeting
5. How to Request an Introduction
6. How to Get Early Momentum
7. How to make a Good Pitch Great
8. The 5 Most Common Pitch Mistakes
9. Meeting Requirements
10. The Basics of Meetings
11. How to Handle an Angel Investor Meeting
12. Know these Numbers for your VC Meeting
13. 4 Investor Gotcha Questions
14. How to Follow-Up After an Investor Meeting
15. How to Close the Lead Investor
16. The 4 Stages of a VC Process
17. How to Raise a $2 Million Seed Round
18. Go from Investor YES to Cash in Hand
19. When Investors Say Yes but Mean No
20. When and When Not to Use an Investors Name
21. Stop Making These Common Fundraising Mistakes
22. How to Avoid Bad Terms that Kill Startups
23. What to do After Receiving a Term Sheet
24. Term Sheet Problems Part 1 — Money Talks
25. Term Sheet Problems Part 2 — Boardroom Blues
26. Term Sheet Problems Part 3 — Side Letters
27. 10 Traits of Successful Founders
Sterling Road invests in pre-seed B2B startups based in North America. Full process here: sterlingroad.com/process.
You can reach me here: email@example.com
Thanks to Kaego Rust for their help on this article.
Photo by Arthur Osipyan