What is the typical funnel of a Venture Capital Investment?
Understanding the funnel of a VC investment and why is crucial for both entrepreneurs and aspiring venture capitalists. How to Land in Venture Capital #3
Welcome to another edition of How to land in Venture Capital: a weekly newsletter on the new ventures’ ecosystem. On this episode you will understand the funnel of a VC investment and why is crucial for both entrepreneurs and aspiring venture capitalists.
On my newsletter, you will see every week a summary of every deal that has happened in the Iberian market and either an analysis of a startup or a piece of research in the VC ecosystem aimed to help young professional to land an internship in Venture Capital.
My name is Conrad and I work as a Startup Analyst. I help founders and investors achieve their goals by connecting both parties to financing opportunities. Additionally, I love to provide mentorship to guide startups on how to secure funding.
If you want to chat, drop me an email at conrad.carbonell@iese.net.
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News on Iberian VC Investment Deals
Capchase, a financing platform designed to finance the growth of operations with cash tied up in future monthly created in Madrid, Spain raised €105 million of debt financing. Capchase continues to expanding to Europe, and the funds will be used to support flexible financing for SaaS companies in Europe.
Rows, a developer of an interactive web application designed to bring general-purpose computing to everyday business people with presence in Porto, Portugal raised €8 million in a Late-Stage deal. The funds will be used to make data integrations even faster and easier, continue to enhance AI features.
Unlockit, a B2C Real Estate platform designed to tokenize and decentralize assets based in Lisbon, Portugal, raised €1.4 million in a Seed round led by Eaglestone Group.
Emendu, an online device rental platform based in Valencia, Spain raised €300,000 in Accelerator/Incubator funding lead by Decelera Ventures.
Working as a VC Investor #2
What is it the funnel of a typical VC Investment?
Understanding the funnel of a VC investment is crucial for both entrepreneurs and aspiring venture capitalists for several reasons:
By knowing the funnel, entrepreneurs and aspiring venture capitalists can tailor their pitches, documentation, data, and approaches to align with each stage of the VC’s process, increasing their chances of securing either funding or to break into the field.
Also, entrepreneurs gain a realistic understanding of the investment process timeline and the various stages of scrutiny their startup will undergo, helping them manage their expectations and plan accordingly.
This analysis follows the standard funnel utilized by most VCs:
Deal Sourcing (first part of the Dealflow)
Deal Screening (second part of the Dealflow)
Due Diligence (formal analysis)
Investment Decision (term sheet)
Portfolio Management
Exit
Deal Sourcing
This is the stage where potential investment opportunities are identified. Deal sourcing methods can vary widely and may include networking, referrals from other investors, participation in industry events, inbound inquiries from entrepreneurs, use of data platforms like Crunchbase or PitchBook, proactive outreach by the VC firm's associates or partners, etc.
Also, it’s essential to capture the majority of good deals as VCs have limited opportunities to invest. Analyzing non-valuable companies is a waste of time, so efficiency and speed are crucial. There's a saying about the winner’s curse and the loser’s curse: if you can't identify and secure the best deals, you'll most likely fail.
OK Conrad but, where can I find the best deals in Europe, and specifically in Iberia?
There are different methods to be able to capture startups (in deal sourcing). The most important and effective ones are:
Events: the most powerful and popular way. Event such as 4YFN (Barcelona), South Summit (Madrid), Mad Blue (Madrid), among others, are a really interesting place to meet founders and their startups; also, it is a great place to meet other investors and get funds for your VC fund.
Co-investors: VCs often invest alongside other VCs. The reason may be the diminishing or sharing of the risk or may be that their strategy it is not to lead the investment. These co-investors can become regular partners, so it's important to build relationships with other investors.
Entrepreneurs: Entrepreneurs who have had positive experiences with a VC are likely to recommend them to other entrepreneurs. Remember, this a world of referrals and word of mouth, a tiny, little world. So, networking and maintaining a good reputation are crucial.
Investment Forums at Business Schools: Innovation and education often go hand-in-hand, making these forums valuable for discovering new business ideas.
Forums for Business Angels: These might focus on pre-seed startups but can be great places to meet founders and hear pitches.
Demo Days of Incubators and Accelerators: These events showcase what teams have accomplished with professional support.
Newsletters: Dealflow.es is well-known in Iberia.
Specialized Websites: Emprendedores.es, Elreferente.es, Expansion.
Data Platforms: Crunchbase, PitchBook.
Deal Screening
Once potential opportunities are identified, they undergo initial screening to assess their fit with the VC firm's investment thesis, criteria, and preferences. This stage involves evaluating key aspects such as the market opportunity, team, product or service, competitive landscape, and traction achieved.
Once a VC shows interest on a startup, it firstly asks for the Deck (a Power point presentation, no need for an NDA here) and funding amount. If there is alignment with the VC's strategy, a first call is set up, followed by more information requests, startup C-level meetings, and analysis of metrics, traction, performance, product demos, and client feedback.
VC Analysts and VC Associates might screen over 1,000 startups a year.
The first company we analyzed, Genesy AI, a B2B data aggregation with outreach automation
The screening process involves checking for:
Viability: Ensuring the startup matches the VC’s strategy and has a competitive advantage.
Feasibility: Assessing the team, product, business model, and market timing.
Investability: Confirming scalability, customer satisfaction, and potential exit opportunities.
Startups that pass this initial screening proceed to further evaluation, while others are rejected.
Due Diligence
The due diligence process verifies that everything about the business is as it should be. If significant issues are found, the deal often falls through. This stage involves a thorough examination of financials, legal matters, intellectual property, customer references, and market dynamics to validate key assumptions and risks.
Investment Decision
Based on due diligence findings, the investment team decides whether to proceed. This decision considers everything above mentioned and is usually the Partners or GPs whose finally decide whether to invest or not. Takes everything into account, from the potential ROI, alignment with the firm's strategy, team strength, competitive positioning, perceived risks to the exit strategy.
If the decision is to proceed, negotiations on deal terms and structure are initiated, the mythical term sheet.
Check out out last analysis: Distinkt, a deep-tech ink nano-technology creator.
Portfolio Management
After an investment is made, ongoing portfolio management is crucial. This involves providing support, guidance, and resources to help portfolio companies grow and succeed. VC firms may also take an active role in governance, strategic planning, and facilitating connections with other investors, partners, or customers.
Exit
Ultimately, VC investments aim to generate returns through exits, which can occur via acquisition by a larger company, initial public offering (IPO), or secondary sale of shares. The timing and method of exit depend on factors like market conditions, company performance, and investor preferences.