A frequently asked question by founders at the end of a pitch meeting is, “What does your process look like?”. This is another way of asking:
a) When can I expect you to tell me whether they are interested in my company?
b) How much time should I expect to dedicate to the process?
While no two are the same, I will sketch out the typical investment-decision process at NXTP Ventures when we are leading an investment round. This should give founders a better understanding of what goes on behind closed doors.
The Initial Pitch Meeting
This meeting is all about getting to know the founders and understanding whether their idea fits with what we look for in a startup.
- Do the founders seem sharp, driven, and analytical?
- Are they addressing a large market opportunity?
- Are they meeting that opportunity with a well-thought-out business model?
Sometimes, we don’t have the answer to all those questions after a 45-minute meeting but we will have a hunch. And if it is positive we will openly express that we are eager to spend time improving our understanding of the opportunity. If we don’t have a firm point of view, we will likely communicate that we need time to discuss internally. Usually, we will revert in less than a week with feedback or information on next steps.
Initial Assessment of Opportunity
If the pitch sparks interest, we start the process with few work streams that run in parallel:
- Desk work: This consists of researching the market, product, and competitors.
- Founder reference checks: We reach out to our network to learn more about the founders. We speak to everybody from former colleagues and bosses, to mentors, friends, and acquaintances.
- One-page summary: We put together a one-page summary on the opportunity for discussion with the investment team.
- Expert network: Once the team agrees we should spend more time on the deal, we usually reach out to our expert network for a validation of the opportunity and continue with founder reference calls.
Our investment process builds incrementally towards the conviction there is a real opportunity to build a large business. This is an iterative process. We are gathering as many data points as possible so that, if and when we say yes, we do so with maximum conviction and enthusiasm.
Second Call with Founders
After our initial desk work and expert calls, we put together a list of questions pointing to where we see potential challenges for the business and areas we would like to learn about. Our main objective for second meetings is to learn more whether it meets what we look for in a startup and to answer a series of questions about the founding team:
- How are the founders responding to and thinking through the questions we ask them? We try to assess the depth of the founding team’s answers and see how analytical and data-driven the responses are.
- Have they already thought about these questions before and have they have performed any analysis on them?
- Does the company show a data-driven culture? While founders answer questions, it is great to see them open live, working documents and dashboards that the company uses internally. This gives us a glimpse into company culture and how they approach key challenges.
Oftentimes, these calls will end with a first data request such as a spreadsheet file with that contain the following information:
- Historic company KPIs
- Revenue per customer file
- Information on customer acquisition and retention
- Go-to-market strategy
Shipping these documents promptly is appreciated and, data in hand, we dig into the numbers to learn more about the business and to answer questions about the financial profile of the business, revenue growth & upsell, customer acquisition & retention, and gross margins, to name a few. All the while, founder reference calls continue and should be well above five at this point.
Meeting the Rest of the Team
As we process the data, we continue with expert calls and produce a new list of questions, more detailed and specific. At this point, we like to invite other members of the management team to the meetings to get an idea of the quality of the C-suite executives. We love seeing a deep bench of quality professionals as this is often indicative of the type of talent the organization is capable of attracting. We typically meet with the head of marketing or sales, the head of product, the CFO, CTO, or any other key members of the team.
Once these meetings conclude, we hope to have substantially concluded our business diligence. Pre-COVID, these meetings typically took place in person during two-day on-site visits. That is our strong preference. However, we are being forced to get comfortable with doing this remotely nowadays.
Getting to a Term Sheet
With the business diligence largely completed and if all reference calls check out, we proceed by sending the founders an email summarizing the terms of the proposed investment. Once we align on the macro terms, we get the lawyers involved to draft a formal term sheet. If there are any outstanding items that we still need to diligence, we will lay them out or include them as conditions precedents to the signing of the final financial agreements.
With a signed term sheet we kick off legal due diligence and, depending on the stage of the company, financial due diligence. These processes are run by qualified third parties that work closely with you to make sure the company is investment-ready and we have a full understanding of its legal and financial history.
Signing a term sheet is a huge commitment for us and it should be interpreted as such. It means we are committed and excited to partner with you and, barring any seriously troubling new information or a stark deterioration in business fundamentals, we will
Final Financing Agreements
As the final legal due diligence (and financial DD for later-stage companies) is conducted, we usually get the ball rolling on drafting the final financing documents. Ceteris paribus, this process will be more time-consuming for later-stage companies and more straightforward for early-stage startups.
For seed rounds, we usually opt for minimizing cost and time by running with the standard series seed investment agreement or opt for SAFEs/convertible debt agreements. We like to spend as much time as necessary going over the terms with founders to make sure they have a full understanding of what they are signing.
Throughout the process we have frank conversations with the founders about what it means to work with us, what we expect of them, and what they can expect of us. Setting clear expectations is key to a successful and enjoyable working partnership.
Length of Process
The final question to answer is: How long does this process take? Unfortunately there is no one answer as this depends on a variety of factors. From first meeting to term sheet could be as little as three weeks up to three months. Usually, once a term sheet is signed, final investment docs are countersigned approximately four weeks later, though this can sometimes be shorter or longer depending on the underlying structure and complexity of the legal and financial due diligence.
Does this sound like an involved process? Perhaps. But picking an investor for your company should not be a decision you take lightly. Due diligence processes are a two-way street. Founders should welcome the opportunity to get smarter on how investors view their business and, more importantly, get to know the partners they are going to work with for the next five-to-ten years.