The process of raising venture funding generally goes something like this. Depending on the stage you’re at, your experience and reputation, and connections some of these steps can be skipped:

1. The Introduction

You get introduced to a firm through a former entrepreneur they’ve invested in, an investor they’ve worked with in the past, a trusted attorney they know, or at a Venture Conference.

2. The Initial Review

An associate at the firm reviews your executive summary and gives a cursory look at your full plan and projections and if interested, schedules a call with you. It helps if you already have existing revenue or have had a previous successful venture.

3. The First Call

You speak with the associate by phone about what you are doing.

4. The Partner Discussion

If the associate likes what you are doing, he or she speaks to a partner at the firm about the opportunity.

5. The First Meeting

If you can get the interest of a partner, they will invite you to their offices to meet you, or meet at your office if you have an office, depending on their level of interest and your location. During this first meeting you will generally discuss your:
a. Background and Experience
b. Team Makeup c. Competition
d. Product Differentiation
e. Market Size
f. Funding Needs

6. The Valuation Discussion

After the first meeting, if the partner remains interested, they may attempt to feel you out for the target valuation you are seeking. They also may choose not to discuss valuation and simply make an offer with the term sheet. If you are in a position of strength, you may wish to discuss valuation upfront yourself so you don’t waste time. Be prepared with revenue multiples from both public companies that are similar to yours and private comparables. Depending on many factors (team, technology, industry stage, revenue growth, market size) one can expect to be able to raise funds at 2x to 10x your revenues from the trailing twelve months or 1x to 4x your projected revenues from the next twelve months. If you don’t have any revenues yet, the valuation will be whatever you can negotiate with an investor and based upon your experience and any intellectual property you have. At the end of the day, the market valuation for your company is what an investor is willing to pay—and as such it is important to have multiple firms competing to invest in your firm if possible. Depending on the stage of your company, you may be able to raise funds at a 30% to 60% discount off the public market trailing or forward revenue comparables.

7. The Partner Presentation

Present to If you can come to general valuation range that you are both comfortable with, the partner may invite you to present in person or via videoconference to their full partner team. Prepare well and give a knock-out presentation. Invest in a graphic designer to make your presentation look nice and go heavy on actual examples of customer use and light on complex slides. I have seen a short flash product demo video or customer video interview within the presentation work well. Don’t let any slide have more than five bullet points or fifty words. Your presentation is likely to be between 15 and 60 minutes.

8. The Initial Due Diligence

After the presentation to the full partner team, if the partners like the deal, they may ask for some additional due diligence items such as your full financials and want to speak with other members of your team and some of your customers.

9. The Term Sheet

If all goes well during the initial due diligence phase, the venture firm may provide you with a term sheet. A term sheet is generally around two to eight pages and is an indication of interest in investing in you. With a term sheet, the investment firm attempts to create agreement around the general terms of the deal before the lawyers create the more extensive twenty to forty page investment agreement document. Depending on the amount of money you are raising, sometimes you will raise money from multiple firms at once in a syndicate deal. If this is the case, one firm will likely lead the deal and the other firm(s) will agree to the same term sheet. Often the first interested firm will be able to bring syndicate partners to the table, although sometimes you may need to find them yourself.

10. The Attorney Review

Once you receive a term sheet, have your attorney review it right away and provide feedback before you discuss it with the investment firm.

11. The Term Sheet Negotiation

Once you have reviewed the term sheet with your attorney, have a follow-up conversation with the partner or associate you are dealing with to negotiate the term sheet. Make sure you know which terms are the most important to you going into any negotiation (generally the valuation, option pool size, liquidation preference, participating preferred, founder revesting, and preferred stock veto rights). You may wish to have your attorney (or CFO if you have one) negotiate the finer points directly with the firm’s attorney. At this point it is critical to have a top tier venture attorney on your side. These attorneys generally bill between $250 and $500 per hour depending on their experience and the market. Your negotiating power will be based upon:
a. how much you need the money;
b. the reputation of the firm;
c. your reputation as an entrepreneur;
d. any past successes you’ve had;
e. your experience;
f. the quality of your management team;
g. the members of your advisory panel;
h. the size of your addressable market;
i. your market timing;
j. the quality of your technology and IP;
k. your ability to walk away; and
l. whether you have other competing term sheets.
Know that it is generally taboo to provide specifics to one firm about another firm’s term sheet, but you can often provide generalities or refer to wanting to have a competitive process in order to have more power in negotiating the term sheet. Do not sign the term sheet until you have negotiated it to your satisfaction and your attorney approves signing it. Once you sign a term sheet, it is very difficult to negotiate any changes in the final document. If you can create a parallel process and receive multiple term sheets you will have more power. It often will take three or four negotiation iterations to get a term sheet both sides are happy with. It can take a lot of time (and a few thousand dollars of attorney fees) to effectively accomplish this—and may be impossible without the right experience and revenues. We were unable to create a truly competitive process during our seed round, but did accomplish a competitive round in our Series A after we had $6 million in annual revenues, great technology, and rapid growth. While it can take six to eight weeks after the first meeting to get a term sheet from a venture firm traditionally, once you have an existing term sheet you may be able to get competing term sheets in as little as one to two weeks. Group mentality does at times take hold, causing the valuation to be bid up with multiple players in the deal and some of the secondary terms to be softened. This noted, at some point it can be unhealthy to push the valuation up. The highest bidders are not always the best firm for you to work with.

12. The Term Sheet Signing

Agree to the general terms of the deal and either digitally sign the term sheet or sign in person.

13. The Full Due Diligence

Once you sign the term sheet, a more extensive due diligence list will be provided to you. This list may include items such as:
a. Detailed sales pipeline
b. Revenue by customer type
c. Detailed operational plan and budget
d. Full business plan
e. Hiring plan
f. Detailed revenue assumptions
g. Audited financial statements
h. Bank reconciliation detail
i. Product Pricing list
j. Detailed product roadmap
k. Customer, Employee, Insurance, and Lease contracts
l. Relevant whitepapers and analyst coverage
m. Details on IT infrastructure
n. Current partner list
o. Lead generation processes
p. Customer satisfaction survey
q. Customer reference list
r. Details on intellectual property
s. Current capitalization chart with options detail
t. Organizational chart
u. Salary and bonus structure for company
v. Employee turnover
w. Management background checks
x. Competitive analysis
y. Expected acquirers
z. Past board meeting minutes

14. The Final Investment Documents

Once this due diligence is complete, if all goes well, you will receive the final investment documents from the investment firm’s lawyers. Have your attorney review it closely and negotiate any needed changes. Pay especially close attention to any representations and warranties you are making as an officer of the company and personally. The final investment documents generally include a:
a. Share Purchase Agreement
b. Investor Rights Agreement
c. Right of First Refusal and Co-Sale Agreement
d. Voting Agreement

15. The Deal Signing

Provide your company bank account information, close the deal, watch the funds go into your account, breathe a sigh of relief, send out the press release, and welcome your new investor(s) and board member(s) to the team with a celebration open house, exchange of company swag, and thank you card. Then get going on growing revenue.

As you can see, the process can be arduous and long, especially if you are dealing with multiple firms and trying to parallel process to create a competitive round. At the end of the day, even if a firm is not interested, try to build a relationship for the future.

(Source: Ryan P. Allis for ZeroMillion.com)