Venture Capital - What Happens After The Due Diligence Process
There are many important sectors of the economy that are hugely dependent on venture capital. As a result, when venture capital firms are deciding where to allocate their investments, they have a significant impact on the firms in these sectors. In most cases, entrepreneurs will be looking for professional advice about what type of business model may work best for them and how much money it may take to get their company off the ground.
If you're an entrepreneur looking for investment capital and wondering if you're ready to move onto the due diligence process after your initial discussion with a possible investor at their office, this post is just what you need (along with any additional questions we might not have covered). So let's get started...
What is the due diligence process for a venture capital investor?
Before you can even think about getting the money to get your business off of the ground, you have to convince an investor that it's actually worth investing in. This is where the due diligence process comes into play. The investor will want everything from financial statements and company strategy down to your marketing and sales approaches. They're going to analyze all of these factors before they even put out a term sheet. If they don't like what they see, then it doesn't matter how hard you try or how great of a personality you have, they won't invest in you.
Early-stage investors may even reach out to your customers, suppliers and competitors to find out what they know about your business. They may ask you for your credit report so that they can check it for any red flags. Most venture capital investments are going to be on a convertible note, so you'll need to have a business plan on how you're going to pay the note back before you can even get started with the due diligence process.
Who should you be hiring to work at your business?
As a general rule, the ideal person to hire for a small startup is someone who has been an entrepreneur before and has already taken the risk of launching a small business. It still takes a lot of money to get your company off of the ground, so you'll be looking for someone who is familiar with running a business.
Ideally, they have some experience in sales or marketing. However, they don't need to have extensive knowledge in these areas. They just need to understand how VCs think and approach investing in early-stage businesses. You can also ask them about their banking experiences if that's something that's important for you as well.
Do you need to pay for a lawyer?
The general rule of thumb is that you should always have an attorney on your side when it comes to doing business. However, if you're using an attorney just to review your contracts, then you really don't have to pay them. They can walk you through the process and explain what everything means. You might even be able to work with a free legal aid if you're looking for a local attorney.
If, however, you're going to be hiring all of the necessary employees and possibly co-founders, then it's most likely in your best interest that you use an attorney from the beginning. They can help you with everything from setting up the entity to creating your operating agreement so that you know everything that's necessary down the road.
What are your taxes going to look like?
Every business owner needs to take care of their taxes. There's no way around it. As a startup, you will most likely be filing as an S corporation or LLC to save money on salaries and employee benefits like health insurance. However, every month, you'll have to pay your payroll tax and file some tax forms along with your personal income tax report. Depending on how small your business is, this can easily take over a month of time out of your day.
You may also be making some tax decisions in regards to your investors. When you're looking at whether or not an investor should be allowed to write off their interest on your note, they will want to know if you're doing the same thing. If not, then they might consider taking their money back from you.
How much money should we ask for upfront?
The time that a venture capitalist invests in your company is going to depend on how much money he's going to put into the company and how long he expects it to last. As a general rule, the more money you ask for upfront, the longer that the venture capitalist is going to be around to help you get your business off of the ground.
Here's an example of how that might work:
If you're looking for $5 million dollars from a venture capital firm over a period of five years, then you are going to need about $1 million dollars every year. If you ask for this much money just at the beginning, then it might be too much for a venture capital firm. Instead, ask for less money upfront and more in later rounds. You can always come back and talk to them about investing more later on down the road if you have a good reason why they should do so.
Who will be your first investor?
The thing about venture capitalists is that they tend to have a good track record of securing early-stage investments from other portfolio companies, so you can usually get something from them pretty easily. Most of the time, you'll end up asking for less than what you think it's going to take, and they'll be happy to help get your business off on the right foot with their first round of funding. Other times, it just might work out that your startup is so promising that the investors are willing to give you more money than you initially thought you'd get.
There's also the case where you ask for a lot of money, but they think your business is going to fail. In this case, they may not want to give you any money at all. However, if your startup works out and gets accepted into their portfolio, then things can change quickly and you can get more money that was originally allotted to you.
What are the perks of going with a venture capital firm?
One very important thing is that they generally have some kind of network that can help you with finding even more investors in your industry. They'll also be willing to work as your customer service representatives as well as handle any legal issues that come up for the life of their investment.
Conclusion
After getting your business up and running, you need to start thinking about what you're going to do with venture capitalists. Once you have everything all planned out, then you can start putting yourself out there by approaching investors and understanding how much money you may be able to get.
With the right kind of startup venture capitalists, you can rest assured that your startup will be doing great no matter what happens along the way. Get ready for your venture capital ride!
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Source by Rian Smithson & Bill Murphy-Bergman – AhaMovement.com! Team Members: Rian Smithson & Bill Murphy-Bergman.