Identify and briefly describe, in order, each of the four major stages of the venture capital process.
What will be an ideal response?
A. Preliminary screening-The preliminary screening begins with the receipt of the business plan. As the starting point, the business plan must have a clear-cut mission and clearly stated objectives that are supported by an in-depth industry and market analysis and pro forma income statements. The executive summary is an important part of this business plan, as it is used for initial screening in this preliminary evaluation. Many business plans are never evaluated beyond the executive summary. When evaluating the business, the venture capitalist first determines if the deal or similar deals have been seen previously. The investor then determines if the proposal fits his or her long-term policy and short-term needs in developing a portfolio balance. In this preliminary screening, the venture capitalist investigates the economy of the industry and evaluates whether he or she has the appropriate knowledge and ability to invest in that industry. The investor reviews the numbers presented to determine whether the business can reasonably deliver the ROI required. In addition, the credentials and capability of the management team are evaluated to determine if they can carry out the plan presented.
B. Agreement on principal terms-The second stage is the agreement on general terms between the entrepreneur and venture capitalist. The venture capitalist wants a basic understanding of the principal terms of the deal at this stage of the process before making the major commitment of time and effort involved in the formal due diligence process.
C. Due Diligence-The third stage, detailed review and due diligence, is the longest stage, involving between one to three months. This includes a detailed review of the company's history, the business plan, resumes of the individuals, their financial history, and target market customers. The upside potential and downside risk are assessed, and there is a thorough evaluation of the markets, industry, finances, suppliers, customers, and management.
D. Final approval-In the last stage, final approval, a comprehensive, internal investment memorandum is prepared. This document reviews the venture capitalist's findings and details the investment terms and conditions of the investment transaction. This information is used to prepare the formal legal documents that both the entrepreneur and venture capitalist will sign to finalize the deal.
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