How to get VC funding?

Now that we have a broad overview of VC history, structure, and incentives, let us understand how the dealmaking works. I will try to keep it simple since several founders and VCs have spoken about this part of the process several times already.

Something that is not spoken about often is how close-knit the VC circles are. And it was intended to be that way since inception – for breaking into the circle was the first test VCs looked for in founders. The thought process there was that if founders could break through into the VC circles, they could eventually do that for hiring, collaboration, and whatnot. So, it was the first test of sorts. Given the explosion in the number of VC firms in India today (around 1500 VC AIFs registered), it has become easier to get in touch with VC firms and pitch.

It was not initially this easy. But yeah, the first step in getting VC funding is to research who are the VCs backing specific sectors and are passionate about the sector you are working in. This is quite important given how investor roles have evolved over time from being just capital allocators. Founders usually go for investors who can help the business with advice and look for help with governance and networking. The past few years have been a founder market in the VC ecosystem – meaning there are many more sources of capital to choose from – which made it easier for founders to pick investors. But going forward, seeing how this trend continues will be interesting. 

Now that you have a list of a few VC firms that might be a good fit for your startup, you have two options – reach out directly to the partners at the firm or get someone from your network to make warm introductions. Warm introductions go a long way in setting founders up to get a response quickly. But in the past few years, with capital being abundant, VC firms have also focused on responding quickly to direct pitches that have landed in the mailbox or have arrived through Twitter, LinkedIn, or other social media channels. 

Once you get in touch with a VC firm, they will set up an initial introductory call, where you take them through the journey, the business, the team, the product, the traction, and the rest of the shebang. The VC firm gets the analyst team to review all the information you share with them and take a call on whether they should do a further deep dive into the business. At this stage, a VC firm filters out 99% of the pitches they get. While this % might differ slightly between firms based on focus areas and relevance of startups reaching out, usually, a large number of startups do not get a callback for a second round of discussions. 

But if the second round of discussions happens, the VC firm likes the business and wants to learn more. There is no guarantee that the VC firm will invest at this stage, but they would want to learn more and build a case around the investment. The VC firm will then ask for more information, do 2-3 more in-person conversations, do some due diligence and background checks, and solidify their view of the investment opportunity. By this stage, the senior partners from the firm are involved in the decision-making to take the investment opportunity to an Investment Committee (IC) (will write a short blog on what an IC does, how it is created, who is part of it and the details around it shortly). Think of the IC as the final leg of the decision-making for the VC firm. 

Once the IC signs off on the investment, the VC firm offers the startup investment along with the terms. Usually done through a legally non-binding document called the term sheet. Will explain the different parts of the term sheet in another blog separately, but it lists out the investment amount, the valuation the VC firm ascribes to the business, and the terms of the investment. The founder then reviews the investment offer and decides whether to proceed. 

In the next few blogs, we will go through what an IC is, what a term sheet is, and some of the details around that. Until then!

This is the fifth post by Dinesh Pai in the Venture Capital category. Dinesh heads investments for Rainmatter and is an avid blogger.