Investment process

PE/VC point of view

Startup point of view

Understanding how investment process works from startup’s point of view is important. But what is also important is PE/VC side of the deal. This guide on how PE/VC sides of the investment process works is useful for startup founders to understand that it is also not easy for PE/VC investment teams to defend any project and get approval from their investment committees. It requires time, effort and a lot of management work, especially guiding the startup management team through the deal process from kick-off meeting to money transfer without killing each other in the process.

Ongoing process
A
Deal sourcing

Industry analysis: identification of segment opportunities and the future potential of the subsegments, global and regional trends, fit with the investment guidelines of the PE/VC fund.

Identification of capitalization and valuation principles, peers and benchmark company analysis.

Deal generation: identification of potential investment targets and pipeline generation.

Key responsible team members:
  • Investment directors
  • Investment managers

together called Investment team

2-3 weeks
1
Initial review/screening
  • Fit within the overall pipeline of the PE/VC fund (investment criteria).
  • Preliminary assessment of development strategy, past performance, identification of risks and opportunities of the project that includes:
    • Long-term vision and urge to grow
    • Team quality and managerial skills
    • Commercial orientation of the project
  • PE/VC fund contribution to assure profitable growth and value creation by mitigating risks and reinforcing opportunities.
  • Negotiations and signing NDA (if needed).
  • Preliminary valuation
  • Internal approval: internal committee approving Due Diligence expenses.
Key responsible team members:
  • Investment directors
  • Investment managers
  • Investment analysts
  • Internal committee/ Board of Directors*

*whichever is present in the PE/VC fund

4-7 weeks
2
Due diligence and deal structuring
  • Financial, legal, business, market, audit, tax, technical, and environmental due diligence.
  • Risk analysis: product risk, market risk, technological and entrepreneurial risks.
  • Concept paper and business plan development.
  • Valuation (sometimes external consultant is hired).
  • Deal structuring and signing of Term Sheet.
Key responsible team members:
  • Investment directors
  • Investment managers
  • Investment analysts
  • External consultants (financial, legal, tax)
3-4 weeks
3
Approval process
  • Sending information to Investment Committee for analysis. Investment committee usually is made up of LPs representatives and advisors (from 3 people).
  • Presentation of the project to the Investment Committee by investment team.
  • Investment committee decisions:
    • Deal is approved
    • Deal is not approved, as some deal aspects need to be restructured/changed (for example, new covenants to be added), so Investment team returns to Due diligence and deal structuring process to present the project and deal after the changes are made
Key responsible team members:
  • Investment directors
  • Investment managers
  • Investment committee
3-4 weeks
4
Closing and signing
  • Legal structuring of the deal: either internal legal team or external advisors prepare legal documents that includes the following documents:
    • SHA (Shareholders’ agreement)
    • SPA (Share purchase agreement)
    • SAFE (Simple agreement for future equity)
    • Other documents (if required)
  • Signing of legal documents (which contain CPs for money transfer)
Key responsible team members:
  • PE/VC fund legal team
  • Investment directors
  • Investment managers
5
Money transfer
X
Post-investment activity
  • Help in shaping the direction of the portfolio company:
    • Strengthening company’s corporate governance (setting up the Board of directors with several representatives of the PE/VC fund)
    • Enhancing marketing, accounting and other business lines by providing relevant contacts/support
    • Assisting in further capital raising
Key responsible team members:
  • Investment directors
  • Investment managers