Venture Capital

Investment Approach
Due Diligence
Staging and Syndication
VC has many
flavors, but
there are only
three
fundamental
ways to pursue
it well.
 Venture 1.Add Value
Capital 2.Source better
Strategies 3.Invest better
1: Add Value
Adding value is a real strategy
because it moves existing
investments up the curve. It
increases the return on an
investment. Investments move
up the tail of the curve because
of the value the venture investor
creates.
2: Source
Better
Sourcing better is a real strategy
because it rescales the
distribution. Even a random
selection of investments from a
better-sourced distribution of
companies will have a higher
expected return than an average
venture fund.
3: Invest
better
Investing better is a real
strategy because you end up in
bigger winners. It increases the
frequency in the upper tail of
outcomes. In the graph above,
investing better switches the five
investments from light-grey to
the new orange bars.
  These three strategies will not look the same or
be equally relevant for all funds. There are many
ways to execute, and the winning approach
depends on the investment stage and people
involved. And while all three strategies add
Putting it to portfolio value, resources are limited and a fund
Work should think through which can add the most for
them. Finally, there is some logical order to
developing capabilities. For example, if you
can't source at least some great deals, you really
won't be able to pick great ones either.
  1. Align with the firm's mission and
Tips for
Successful values: A VC investment strategy should
align with the firm's overall mission and
Venture values. This will ensure that the
Capital investments align with the firm's purpose
Investment and impact goals and contribute to its
Strategies long-term success.
  Seek diversity: Diversity is key to a
Tips for
successful VC portfolio. This includes
Successful diversity in sectors, stages, geographies,
Venture and types of deals, as well as diversity in
Capital terms of the team and the portfolio
Investment companies.
Strategies
  Build relationships: Building strong
Tips for relationships with entrepreneurs,
Successful accelerators, and other sources of deal
Venture flow is essential for a VC firm. These
Capital relationships can provide access to a
Investment wider range of investment opportunities
and valuable insights into the market.
Strategies
  Communicate effectively: Effective
Tips for communication is crucial for a VC
investment strategy. This includes
Successful communicating the investment thesis and
Venture objectives to the team and the portfolio
Capital companies, as well as keeping
Investment stakeholders informed about the
Strategies performance of the portfolio.
  Continuously learn and adapt: The
venture capital landscape is constantly
Tips for evolving, and a successful VC investment
strategy must be flexible and adapt to
Successful changing market conditions. It is
Venture important for a VC firm to continuously
Capital learn and stay up to date with trends and
Investment opportunities, as well as be open to
Strategies adjusting the investment strategy as
needed.
 Stages of
venture capital
  Before accessing VC capital, there is the pre-
seed or bootstrapping stage.
The most common investors at this stage are:
 Startup founder
Pre-seed Stage
 Friends and family
 Early-stage funds (Micro VCs)
 Your company now has a degree of experience and can
demonstrate potential to develop into a vibrant company.
You now need a pitch deck to demonstrate to VCs that
your idea is a viable investment opportunity. Most of the
modest sums you raise in the seed stage are for specific
1. The seed activities like:
stage
 Market research
 Business plan development
 Setting up a management team
 Product development
 Because VCs are assuming so much risk at this
stage, this is possibly the most expensive funding
you can take in terms of equity you’ll need to
give up to secure the investment.
1. The seed The most common investors at this stage are:
stage  Startup owner
 Friends and family
 Angel investors
 Early venture capital
 Series A typically is the first round of venture capital financing. At
this stage, your company has usually completed its business plan and
has a pitch deck emphasizing product-market fit. You are honing the
product and establishing a customer base, ramping up marketing and
advertising, and you can demonstrate consistent revenue flow.

2. The Series A 
This is the time for you to show consistent revenue flow.
stage  Fine tune your product or service
 Expand your workforce
 Conduct additional research needed to support your launch
 Raise the funds needed to execute your plan and attract additional
investors
 The most common investors at this stage
are:
 Accelerators
2. The Series A  Super angel investors
stage
 Venture capitalists
 Corporate venture capital funds
 Family offices
  Your company is now ready to scale. This stage of
venture capital supports actual product manufacturing,
marketing and sales operations. To expand, you’ll likely
need a much larger capital investment than earlier ones.
They’re providing the funds you need to expand markets
and form operational teams like marketing, sales and
3. The Series B customer service. Series B funding enables you to:
stage
 Grow your operations
 Meet customer demands
 Expand to new markets
 Compete more successfully
 The most common investors at this stage are:
 Venture capitalists
3. The Series B  Corporate venture capital funds
stage  Family offices
 Late stage venture capitalists
 When you reach the Series C funding stage,
 you’re on a growth path.
 You’ve achieved success and incremental funding
4. The
will help you build new products, reach new markets
expansion and even acquire other startups.
stage (Series C  It typically requires 2-3 years to reach this phase on a
and beyond) quick trajectory, and you’re producing exponential
growth and consistent profitability.

To receive Series C and subsequent funding, you must

be well-established with a strong customer base.
 The most common investors at this stage are:

4. The  Late-stage venture capitalists

expansion  Private equity firms
stage (Series C  Hedge funds
and beyond)  Banks
 Corporate venture capital funds
 Family offices
  The final stage of venture capital marks your
transition to a liquidity event, either
5. The an exit via going public or M&A. You’ve
mezzanine reached maturity and now need financing to
stage support major events.
  An IPO or initial public offering is the natural
progression of funding beyond VCs.
 It’s the process of taking your private company
Going public public by offering corporate shares on the open
market. This can be a very effective way for a
— the IPO growing startup with proven potential or a long-
established company to generate funds and
reward earlier investors, including the founder
and team.
Going public
— the IPO
 To go public, you need to:

 Form an external public offering team of underwriters,

lawyers, certified public accountants and SEC experts
 Compile all your financial performance information
Going public and project future operations
— the IPO  Have your financial statements audited by a third party
who’ll also generate an opinion about the value of your
public offering
 File your prospectus with the SEC and determine a
specific date for going public
 Going public benefits include:

 An effective way to raise significant capital

 Secondary offerings will enable you to generate
Going public additional funds, typically used to pay off original
— the IPO investors and early leadership team
 Public stock can be more attractive as a part of
executive compensation and as an employee benefit
 Mergers are easier because you can use public shares to
acquire another company
The Dark Side
of Venture
Capital:
Common
Problems and
Challenges
  VC is a complex and dynamic industry that
I. Introduction is constantly evolving. It involves a wide
to the range of players, including entrepreneurs,
Problems and VC firms, and investors, who are all working
Challenges of towards different goals and motivations. As a
Venture result, there are a number of problems and
challenges that can arise in the VC
Capital ecosystem.
 1.Limited deal flow:
2.Competition for deals:
Common 3.Misalignment of interests:
Problems and
Challenges 4.Limited exit options:
5.Limited transparency:
 II. Solutions
for Addressing 1. Build relationships and networks
the Problems 2. Focus on value-add:
and
Challenges of 3. Foster open and transparent communication:
Venture 4. Develop clear terms and exit strategies:
Capital 5. Explore alternative exit options:
 Guide to
Venture
Capital Due
Diligence &
How to
Conduct It
  venture capital due diligence is the process
What is by which investors, usually specialist venture
capital investors, conduct a thorough
venture capital investigation of a young company to
due diligence? establish whether they can invest in it, at
what price, and under which terms.
 Venture Capital Due Diligence is extremely
important precisely because of the information
Why is
gap and lack of historical data that we tend to
Venture
associate with young companies.
Capital Due
The founder of AirBnB was laughed out the
Diligence
Important? door by countless VC investors, who told him
that the idea 'would never work' as people
'weren’t going to let absolute strangers rent
their houses'.
  What market is there for the (sometimes
completely innovative) product or service?
 If there is a market, how will competition
evolve?
Importance Of  How can the company achieve scale?
Venture Capital
Due Diligence.  Will the company be acquired before it grows?
 What valuation can be given to a company with
negative income?
 What importance can we attach to the founders
of the company?
The Venture 1. The Company and its Market
Capital Due 2. Legal Information
Diligence 3. Financial Information
Checklist 4. The Company’s Assets
5. The Company’s People
 1. Establish what specifically the company does and what its market
is.
2. Understand whether the company requires any special permits or
permissions to conduct its business.
3. Gain a copy of all licenses and distribution agreements that the
1. The company holds.
4. Understand the trade relationships or contracts that the company
Company and has, which allow it to do business, or could prevent it from
its Market conducting business in the future.
5. Establish who the company’s competitors are (and who they are
likely to be).
6. Understand if there is a way that a large competitor could
potentially disrupt the company in its current way of doing
business.
 1. Acquire details of all existing shareholders and, if applicable, details of
shareholder resolutions which have passed.
2. Acquire a certificate of incorporation.
3. Obtain details of any capital changes in the company since it was
incorporated.
4. Obtain details of warrants, options, or any other rights pertaining to the share

2. Legal capital of the company.

5. Acquire details of debentures or other financial instruments that pertain to the
Information company.
6. Acquire a list of arrangements (contracts) that could be terminated when the
company changes control.
7. Understand the nature of contracts currently being negotiated by the company.
8. Review contracts already held by the company.
9. Understand whether the company has been involved in any legal disputes in
the past, or whether any disputes are outstanding.
 1. Obtain a copy of all (or any) audited accounts held by the company.
2. Understand which accounting conventions and standards have been adopted
by the company.
3. Acquire a company of all management accounts since the day the company
began operating.
4. Acquire statements of all bank accounts (including credit card accounts) held

3. Financial by the company.

5. Understand the nature of all its debts and debt securities - in particular, its debt
Information schedule.
6. Acquire details of all budgets and financial forecasts, both past and current.
7. Gain an understanding of the company’s credit terms, both those it negotiates
for its own clients and those that it has negotiated with its suppliers.
8. Obtain details of any off-balance sheet commitments of the company.
9. Understand the nature of the company’s distributions paid since its
incorporation.
 1. Obtain details of the company’s machinery, plant, and equipment,
and any documentation (maintenance contracts, leases, etc.)
pertaining to them.
2. Understand whether the company has acquired or disposed of
other assets in the past five years.
4. The 3. Gain an understanding of any contingent liabilities associated
with the company’s assets, particularly its real estate.
Company’s
4. Acquire copies of the company’s patents (if applicable).
Assets 5. Evaluate the company’s patents.
6. Understand whether the company may be in breach of any
intellectual property in carrying out its own operations. Obtain
any IPR that the company uses, but do not belong to it.
7. Does the company have any know-how
 1. Obtain an organizational chart of the company.
2. Obtain details about remuneration, including stock options and benefits.
3. Obtain details about any disputes with current or previous employees.
4. Gain an understanding of the company’s relationship with outside
5. The contractors and obtain a copy of the contract held with each (if applicable).
Company’s 5. Understand the company’s disciplinary procedures.

People 6. If possible, conduct interviews with a selection of the company’s

employees, and attempt to gain an understanding of the company’s culture.
7. Understand which employees left the company in the past three years,
which roles they currently occupy, and whether they might represent
competition.
8. Gain an overview of current positions unfilled or outstanding offers of
employment.
What are the
key challenges  VC syndication is the practice of forming a
and group of investors to co-finance a startup or a
opportunities portfolio of startups. It can offer many
for VC benefits, such as risk diversification, access
syndication in to expertise, network expansion, and deal
flow generation.
emerging
markets?
  One of the main reasons is to overcome the
scarcity of capital and the high uncertainty of
investing in nascent and volatile markets. By
pooling resources and sharing risks, VCs can
increase their deal size, reach, and frequency, as
Drivers of well as mitigate the impact of market shocks,
syndication currency fluctuations, and regulatory changes.
 Another reason is to leverage the complementary
skills, knowledge, and networks of other VCs,
especially those from different regions, sectors, or
stages. This can help VCs to source, evaluate, and
support high-potential startups, as well as to
access new markets and opportunities.
  What are the obstacles that prevent or hinder VC
syndication in emerging markets?
 One of the major challenges is the lack of trust and
transparency among VCs, especially across borders and
cultures. VCs may have different goals, incentives,
Barriers to expectations, and standards of conduct, which can lead
to conflicts of interest, information asymmetry, and
syndication misalignment of strategies.
 Another challenge is the high transaction costs and
complexity of syndication, such as the legal, regulatory,
and operational issues involved in negotiating,
structuring, and managing a syndicate. These costs and
complexity may outweigh the benefits of syndication,
especially for smaller or less experienced VCs.
  VCs in emerging markets structure and organize
their syndicates in various ways. For instance, the
lead-follow model involves one VC taking the lead
role in sourcing, negotiating, and managing the deal,
while the other VCs follow its terms and conditions.
Models of This reduces coordination costs and conflicts among
syndication VCs, but also limits their influence and involvement.
 Alternatively, the co-lead model allows for more
collaboration and balance among VCs, but also
increases negotiation costs and complexity. Finally, a
club model enables more trust and alignment among
VCs, but requires more commitment and
coordination.
  The effects of VC syndication in emerging markets
on the performance and impact of the startups and
the VCs themselves can be either positive or
negative.
 Positively, syndication can enhance the value creation
Outcomes of and value capture of the startups and the VCs, by
providing more capital, expertise, network, and support.
syndication It can also foster the development and innovation of the
VC ecosystem and the entrepreneurial ecosystem in
emerging markets, by increasing the availability,
diversity, and quality of funding and opportunities.
 Negatively however, syndication can reduce the
efficiency and effectiveness of the startups and the VCs,
by creating more agency problems, moral hazards, free
riding, and coordination failures.
  VCs must consider the costs and benefits of syndication,
selecting the right model and partners for each deal or portfolio.
 It is also important to establish clear terms and conditions, roles
and responsibilities, and communication and governance
mechanisms for their syndicates.
Implications of  Moreover, VCs should monitor and evaluate their syndicate
performance and impact, making adjustments as needed.
syndication Policymakers, on the other hand, should create an environment
conducive to VC syndication with adequate legal, regulatory,
and fiscal frameworks, as well as facilitating cross-border and
cross-sector collaboration.
 Furthermore, policymakers should promote a culture of trust and
transparency among VCs by encouraging best practices,
standards, and codes of conduct, as well as enhancing
information disclosure and dissemination.
The End