The Anatomy of VC deal flow

I have spent quite a few hours in VC caves, learning their language and discussing their habits. I learnt a lot about their feeding patterns. What goes on in the depths of the venture capital cave is really a bit scary. Few ever penetrate into the depths to see how these creatures really behave.

I have spent quite a few hours in different caves, learning their language, discussing their habits. I learnt a lot about their feeding patterns and their behaviour. Unlike most, they are very selective feeders preferring to reject most food offered to them.

Let me share with you how these mysterious creatures behave.This is the typical behaviour pattern. In 12 months…

Plans submitted.
Very few keep a record of this number, but it is high. If you just send in a plan chances are that it will end up in a pile in the corner of the office. I have literally seen this happen. I have physically seen those piles of cruelly discarded plans.

A quick (and I’m talking about five minutes) review.
Number reviewed: 509
This company looked at 509 business plans. The investors took plans home and spent about five minutes flicking through them, looking at the executive summary, the deal and returns, the financials and maybe some marketing info.

Now they’re interested.
Number that deserve further investigation: 53
Now that’s about 10%. Raising capital is a pretty tough process. From 509 to 53 after just a five minute glance. That executive summary better be good otherwise you’ll be in the pile in the corner. The 53 now get to make a business presentation.

A more detailed investigation and more discussion.
Number reduced to: 22
The partners in the venture capital firm get together for weekly meetings where they discuss the various companies. After discussions and more detailed cross checking the number left on the table was just 22.

Due diligence
After due diligence number reduced to: 10
At this stage the venture capital firm decided to carry out due diligence on the 22 companies. Now they are spending money – that’s a good sign. In due diligence they look into every nook and cranny to make sure there are no nasty little surprises lurking in the dark.

Hit the jackpot
Number of investments made: 7
After all the checking only seven companies succeeded in raising capital.

That’s just a 1.38% success rate.

That’s a typical process that venture capital firms will go through to decide who to back in business. If things go well, you might sign off in three months but it normally takes longer. It could take 12 months. So be prepared for a time-consuming process. And make sure your cash flow can carry you through.

The main message out of this is to be prepared. You can’t just walk up to either a venture capital firm or an angel investor with a story. You’ll need to have a plan that gets their attention and a business presentation that makes them sit up and really listen.

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