VC Process Guide: 6 Stages to Fundraising Success

© 2020 . Benjamin Scherer
All rights reserved.
Start-Up Fundraising
A comprehensive Process Guide
A sound understanding of the M&A process can help founders understand the fundraising process in Venture Capital.
Author: Benjamin Scherer

M&A / VC
Process
Preparation
Pre-Term sheet
Pre-Closing
Pre-Execution (Precedent Condition Stage)
Execution
Post-Transaction Activity
6 Stage / 30 Steps Process of a Venture Capital Transaction

Introduction

M&A / VC
Process
An overview of sources of financing
Pre-Institutional Fundraising / Before the ISA
Before the institutional financing, there are forms of financing that have far less or almost no impact on the
control and governance mechanism of the business, but still allow professional and institutional investors to
add some forward-looking structure to an investment. The two common ones include:
Convertible Loans: Give the right to convert loan and interest into shares in the future financing round at a
very large discount of the valuation. Does not require the company to fix a valuation at the time of entering
the loan agreement. In case of liquidation, the debt instrument has priority over exit proceeds vs founders.
Simple Agreements for Future Equity (SAFE): Essentially a convertible loan that converts to a fixed share of
ownership in the future, which is achieved via caps and floors and pari passu clauses. The company raises
cash now for e.g. 2% of equity in the first institutional round. It hence is “safe” to get 2% even if the
company raises a hundred of additional convertible debt rounds.
Institutional Fundraising / The ISA Fundraise
With the first financing that comes with a fixed valuation, founders typically have to create new shares,
oftentimes preferred shares. And this is the time when the institutional fundraising starts. The funding
comes with substantial changes to the governance and control mechanisms of the company and regulates
shareholder conflict and death. The preferred shares issued to new investors come with special control and
voting rights attached. In addition, the preferred classes can have financial engineering components that
allows them to participate super linear (relative to the fully diluted ownership) in potential future sales
proceeds.
The Seed / Series A / Series B / Series C round
This is discussed at length in this document. So we don’t discuss it here.
Later stage convertible debt / Distressed
If a company does not proceed to the next stage in time – Series A -> B -, investors will start to bridge the
company. Often, the convertible note returns. Such notes take priority in liquidity over any preferred equity
class. Also, they can feature the right to convert with large discounts and the creation of a new preferred
class with high liquidation preference if the company is entering a liquidation event such as a fire sale.
Debt Based Financing Instruments
Most financing in the growth equity market is based on preferred equity. But an increasing
offering in debt and mezzanine instruments is becoming available in the market.
Venture Debt Financing: With the increasing size of the venture capital asset class, more
and more specialist lenders exist that are willing to offer early stage companies with stable
revenue growth privately placed junk bonds. The loans typically have a very high non-
investment grade interest rate (e.g. 20%) and have mezzanine features (e.g. attached
warrants, convertible features) and hence are potentially dilutive.
Revenue based Financing: A new financing approach grants companies with stable
revenues loans in exchange for a fixed percentage of revenues. This is similar to a factoring
agreement but without the factoring being tied to a specific claim in the accounts
receivables. It is a statistical claim on a portfolio of future accounts receivables and typically
requires a higher priority of payment than other accounts payables. This financing is
interesting if the company has accounts receivable that refer to several months revenues
(e.g. bookings) and still wants to increase its liquidity to expand operations. It is less dilutive
than venture debt.
Secured Debt Financing: If a company starts to build actual assets in its balance sheet that
can be reasonably priced, have a low risk of loss or destruction and that are marketable
under reasonable efforts, the company can securitize loans with these assets. Classic
examples is property, plants and equipment. Sometimes it is physical goods inventory (e.g.
in ecommerce). It can also include patents, brands and trademarks as well as software code
or in some cases even customer data.
Regular debt financing from Short Term Bridges to Revolvers and Bank debt:
Other forms of debt, if not bridge loans from a professional investor, typically require stable
cash flows if they are not secured against assets.

M&A / VC
Process
5 – 12 months 4 – 8 months 2 weeks to 2 months
Inception Preparation Origination and
First Touchpoints
Non-Binding
Term sheet
3 weeks – 2 months
Closing Execution
< 2 months < 2 weeks
Post Investments
Timeline of an Institutional Preferred Equity Financing
Consensus views on timing
▪ Time between raises on average ranges from 14 – 16 months. Business plan should prepare for 16 months runway in the base case, no less than 9 months in the worst case
▪ It is better to plan the raise to be fully executed at least 3 months before potential cash out
▪ It takes around 3 – 6 months to execute a good raise
Example Timelines
▪ A very fast raise – high commitment or a “fire”/”distressed” raise - can execute completely in less than a month, taking around 3 – 4 weeks till cash hits the bank.
▪ The average quick raise will take around 2 months: 3 weeks from first contact to term sheet, 3 weeks due diligence, 2 weeks execution
▪ A normal process takes around 3 – 6 months: 1.5 months from first contact to term sheet, 3-4 weeks due diligence, 2 weeks precedent conditions, 2 week execution
▪ A more complex process of finding and aligning bidders, support built up of syndicate and more changes to the corporate structure will delay the process up to 9 months

M&A / VC
Process
Fundraising Checklist: Seed Investment
Without running a good filing archive and document structure, you might have incorporated, but you are not owner of a business. Get your data rooms prepared
The absolute minimum requirement is that you have all your legal docs, planning sheets and the work folders for your employees in place and organized.
Without creating and power pointing your processes and collecting and controlling data on activity, you are having fun, but you are not running a business. Get your controlling and management
Don’t rely on your brain, your flexible creativity and all that Jazz. Nobody can verify what you did. And you likely don’t know what you are doing. processes set-up and in order
If you are doing a lot of stuff in processes that generate data, find out if processes do not get results and learn how to improve. Or you are just wasting time. Learn how to manage performance
Learn how to study KPIs, activities that improve them and much faster you can get in improving the core operational aspects of the business
With all that activity and progress, learn to see where you sit in the world and how you position the company for success. Draw a of PowerPoint slides Build your management frameworks
On competition, markets and your position in this environment and which resources you need to get there. / future marketing material
As your understanding of time, resources and progress gets clear, start setting priorities, goals and milestones and find a path toward success Without goals, you are having fun
Every time you are not ambitious enough, be more ambitious. Every time you don’t meet milestones: ask why and recalibrate.
As you start to understand the KPIs and milestones that a funding needs, as how to get there. Fine tune your business plan and start thinking in capital requirements Build your business plan
As you get closer to cashing out or meet your milestones, accept reality and go out seeking funding. Be realistic on where you are and why you are where you are. Start the fundraising process
And finally, remember that anytime someone gave you funding before you achieved all those 101 basics in your business, you were given a free cheque.
Stay humble and meet expectations of your investors and other stakeholders.
If you actually ran a business before seeking funding, chances are you have defensive arguments if you didn’t reach milestones, you have all the documents
and work prepared needed for fundraising. And you should be safe for any thorough discussion on your business during screening and due diligence
Without having a really long lists of tasks, and org chart to distribute those tasks and the people to perform the tasks, nobody knows what you are doing Create and maintain a task list

M&A / VC
Process
Bonus Material: Beware the Early Stage Forms of Start-Up Support that ask for Equity
Very Early Stage Financing
The Value from Real Incubators: At the beginning of the venture financing stage are so called
incubators or accelerators. The notable ones include Y Combinator, 500 Start-Ups, Techstars.
The business model of these investing incubators is simple. Invest e.g. 150k USD into a set of 100 – 500
start-ups for a 10% equity stake and you might lose the entire investment on 99% of the companies,
but the few ones that survive might return more than 1000x their money, returning the investor 10x
on the portfolio. This model only works if the resulting companies can get 1000x returns and that is
only possible if they enter potentially huge markets with winner takes all business concepts and are
financed by tier 1 later stage capital to eventually IPO or sell for a billion dollar valuation. This is
important. This model does not work if 95% companies go into liquidation and the remaining 5% exit at
20x returns. That would be a 1X on the investment. It does not work with the number of companies is
less than 100, because the statistical likelihood of having a winner decreases. These incubators take
only decent to good teams that have a finished product and give them 150k USD for sales and
marketing. It does not work with a weak team with no product that gets 50k USD. If the whole
economics is weak, the model will not work. Hence no tier 1 investors will take notice. No bridging
angels take notice. Hence the rate of surviving companies decreases.
The Sub-par incubators: A specialized niche targeting poor, but talented founders emerged in recent
years. Incubators that only have cohorts of 10 to 20 companies, and invest only 20k – 60k. As
discussed, such models do not really work as well as the real incubator model. Returning multiples of
money invested in activities and the companies is unlikely. This means the people working for such
programs do not rely on the model returning money. Which has a moral hazard problem. With the
cohort being small and the people not being motivated, there is little relevance of these incubators for
institutional investors. Hence there is little chance of using these incubators to get to the next funding
stage. On top, most of the time these incubators market standard packages of thinking about the
problem rather than hands-on support in solving the problem. They don’t get customers in, they don’t
solve hiring challenges, they don’t attract investors, they don’t actually help solve the market discovery
problem. They just take up a lot of time creating documents and giving positive feedback or criticism to
the founders. And the founders they attract are not “team” players in the cohort. The model still works
for cash strapped founders who want 3-6 months runway. Or people seeking a creative sabbatical.
Development for Equity: A recent model that becomes more common is that successful IT
service companies invest up to 150k USD into a company, to then charge the company 100k
for development services, leaving 50k for survival and expenses. On a portfolio level, this
grants these service companies upside potential for their investment; the founders get a
working product and can start marketing the product; and typically 10 – 20% of equity are
lost. This can be a viable model for business professionals who struggle to find a strong
technical co-founder and is an alternative to getting angel investment of similar size and
sourcing an IT service firm. The more successful ones of these investors have ties to angel
investors and Seed VCs. But it locks the company into the network of these firms and makes
an investment from outside investors less likely, unless the company is very successful.
Business Angels: Business angels come in all form. The good ones provide actual capital
ranging from 150k USD to 500k USD and come with a strong network of advisors and other
investors without taking too much cash. They typically enjoy working with start-ups, bring
expertise and use the investment to funnel money to their network to keep it active.
Ways to lose your equity for nothing
Accelerators and Incubators that don’t pay at all
Some programs do not offer any capital and only make founders do analytical research
work while trying to place advisors – for cash or equity – into the company and take stakes
up to 15% of the company for doing so.
Board Seat and Advisors for Equity
From fund raising advisors to people helping preparing a business plan, from people that
just want a board seat to polish their resume, the world is full of people who offer non-
material and low commitment help for equity in the company.
Accelerators
From fund raising advisors to people helping preparing a business plan, the world is full of
people who offer non-material and low commitment help for equity in the company.

Stage 1:
Preparation

M&A / VC
Process
OutreachScreeningAdvisorGoal SettingGeneral Preparation
Stages Stage 1
Preparation
Stage 2 Stage 3 Stage 4 Stage 5 Stage 6
Preparation before actively engaging potential investors focuses on house cleaning, strategizing and sales documentation.
Checklist in Preparation Stage
To some preparing an entire data room of documentation
about the business seems excessive and like a distraction
from business. But in reality, this is not necessarily true.
Why?
1. The due diligence data room requests are very similar
to what is being requested in a comprehensive audit.
Something that might be done before attracting
investors or has to be done after attracting them.
2. In general, having all documents reasonably requested
by investors is equal to saying that a company
management has prepared all the documents that it
needs to manage the business.
3. In general, if good governance and document filing
systems are in place and the company is managed
well, most of the documents should be available.
To understand the typical requirements, one can simply
ask others that have raised capital; or google data room
document request laundry lists; or google due diligence
checklists and translate them into document requests.
In general, a good data room covers:
▪ Legal documents of all kinds ranging from statutes and
bylaws to commercial agreements, labor contracts and
material agreements on rent, etc.
▪ Documents about the capital structure ranging from
cap tables to debt schedules, employment incentive
schemes and any claim on the potential future equity.
▪ Documents about process, data and activity in sales,
marketing and R&D, as well as any production chain
activity.
▪ Documents relating to compliance – from GDPR to tax
and financial compliance – to security – from IP
protection to information and IT security)
In Start-Ups, the entire transaction execution process can
be quite fast. This is why it is better to be prepared and
prepare before even approaching investors.
While there are some documents and activities that are
unique to different types of transactions or even investors,
the general documents and information that needs to be
furnished to attract outside capital and to conform with
the typical requirements of a due diligence can be
understood as general. The first step to really be prepared
before even starting to engage with investors is having a
data room in place that provides all the documents
typically requested by investors during their due diligence.
So general preparation here is to already set-up a data
room full of documents later needed during roadshows,
investor meetings and due diligence.

M&A / VC
Process
Stages Stage 1
Preparation
How to classify the documents that need to be prepared
Fiction
The fiction is looking on the forward looking aspects of
the business and is essentially the preparation of the sales
material for marketing the company.
These documents talk about how the company interprets
the data available on the market and customer needs.
How it derives strategies based on these interpretations –
which are called insights – and how these strategies can
be operationalized and put into action.
Since humans are emotional creatures, founders also
need to create a compelling narrative around the business
for the investors and its customers and hires. A narrative
of the past and experience, a narrative of the big vision for
mankind and how all this fits together.
Apart from telling stories and painting a glorious future,
the key goal of the marketing part is to condense complex
information into easy to read convincing sales material.
Data and Insights Backup
The great story of the future prospects of the business
does normally not simply follow from looking at contracts,
showing sales activity and talking about marketing
campaign budgets.
The company has to learn the language of investors and
customers to craft a story. Talking about use cases, value,
and looking at metrics such as customer acquisition costs,
conversion rates, lead-to-closing times and has to package
its value into a pricing and product bundling strategy and
business plan.
The company has to extend the raw components of its
business with judgemental data – or meta data – to
calculate metrics that can be used to generate insights,
focus activity and learn from the data.
Ultimately it generates data that allows the quantitative
and qualitative assessment of its forecasts and growth
plans and provides a back-up for the claims.
Facts
One area of preparation is essentially focused on ensuring
all the facts of the business are recorded and properly
filed.
Historic records of performance, the capital structure, the
legal constitution that opens the company up to liabilities
and also enables it to capture revenues and profits are
essentially the foundation of the business.
Apart from the areas mentioned already, process
documentation, configuration of operational systems and
the data they produce, and all the artefacts of daily
activity ranging from management meeting protocols to
board presentations to signed contracts with suppliers and
customers form the rather dull area of “facts”.
Also spreadsheets for managing debt schedules, accounts
receivable and payables, scoring cards for the hiring
process and roadmaps belong to the “facts” part.

M&A / VC
Process
Stages Stage 1
Preparation
How the artefacts will be used later during the financing process
Fiction
The fiction is what later will drive the discussion around
valuation of the business and will be used in management
presentations, pitch sessions, when discussing with
experts during the due diligence workstreams.
They offer a condensed, easy to understand and
convincing story of the key drivers of the business, its key
strengths and weaknesses, remedies to weaknesses,
reasons for strengths and so forth.
This is the kind of material reviewed by the investment
team and senior partners of the investment company.
Only in rare cases a senior partner would work on a drill
down in the backup or even discuss facts, e.g.
employment contracts.
Data and Insights Backup
The data and insights back up is what will be extensively
studied by analysts and associated and will also be part of
the data room data exchange. Most questions in the due
diligence raised from this area will focus on how this
information supports the claims of the sales material,
whether it is accurately and consistently calculated, if it
follows from the facts and if there is any discrepancy
between the facts and the derived metrical data.
An example would be if the cost of customer acquisition
do not cover the travel expenses and luxury cars and why
this is the case. Or whether the sales forecast in the
management presentation is backed up by the sales
pipeline data and whether the sales pipeline data is
backed up with artefacts generated in the sales process.
Facts
The facts later will be reviewed by lawyers, auditors, due
diligence workstreams and will be a larger part of the
filing of documents exercise in the due diligence.
The investment team of the investors will occasionally use
the data to fact check the back up material underlying the
management presentations and there will be random
checks performed on the completeness, accurateness and
consistency in the facts area.
Some topics are typically of higher relevance such as
capital and debt structure, incorporation documents and
all major statutes. As well as frameworks behind labor,
customer and supplier contracts.

M&A / VC
Process
Bonus Material: Checklist in Preparation Stage (Sample)
Corporate Documentation
Incorporation Certificates, Statutes (AoA, Bylaws)
Capital Structure (Cap Table, Debt, Convertibles, Vesting)
Founder and Shareholder Agreements
Filing and Registration History (Tax, Financial, other)
(Audited) Accounts History
Financial Documents
Historic Bank Statements
Lists and Contracts (Key) Suppliers / Customers
Debt schedules
Part 1: All the data you would need for an audit
The corporate documentation checklist is an overview
of legal and process documentation that can be provided
during the due diligence.
A sound running business already should have access and
updated records on key items. A proper document filing
system and processes that ensure all documents are
updated serves several key tasks of operating a business:
▪ Keeping track of all legal documents exposing legal and
litigation risk
▪ Allowing drilldown for commercial optimization of
contracts on supply and demand side
▪ Facilitates the proper interaction with external advisors
and auditors
▪ Serves as a single source of truth of the legal status of
the company
Proper filing systems and systematic record keeping also is
required for conducting proper operations management,
financial (e.g. working capital or capital structure)
optimization and performing drill downs for cost and
performance optimizations.
Key Contracts and Liabilities
Minutes, Protocols, Resolutions (Shareholders, Board, MDs)
Historic Financial Model / Operating Model / Business Plan
Investment, Working Capital, Liquidity, AR/AP models
MD Contracts
Financing Activity and Contracts (Active)
Key Customers
Key Vendors / Vendor Concentration Risk
Contract Frameworks (Employment, Customers, Vendors)
Litigation, Disputes (External and Internal/Labor)
Balance Sheet Backup (Equipment, Fixed Assets, Inventory, IP)
Organization
Org Charts incl. Indication on Powers of Attorney
Employee List (Historic, Current)
Hiring Plan (3-5 Years) and Incentive Models
Organizational and Employee Development / Scaling Plan
Material Contracts : Leasing, Rental, Consultants, Lawyers, Advisors
Any invisible third party claims (e.g. Liens on Assets)

M&A / VC
Process
Bonus Material: Checklist of Marketing Material (Incomplete Example)
3rd Party Research – Market and Technology
Market Research (Gartner, etc.)
Sector Development Research (CAGRs, Market Size)
Technology Landscapes (covering start-up landscape)
Industry and Technology Dynamics (e.g. Hype Cycles)
Collected Articles from leading analysts
3rd Party Research – Investment and M&A Activity
VC Activity (Pitchbook, Crunchbase, CB Insights, Pulse)
Exit Activity (Merger Market, CapIQ, CB Insights)
Strategic Buyer Industry Structure (
Laundry Lists of Active Buyers
Collected Articles from leading analysts
Sales and Marketing Activity
Pricing Strategy and analysis of CAC, CARC
Top 20 Deals and Top 20 Customers
Sales Pipeline with Forecasts and Analysis
Sales Channel Efficiency Metrics / Margins
Marketing ROI Analysis (Lead Conversion)
Marketing and PR campaign success list
Key Contributor Pipeline (Sales Execs, Partners)
Research and Development
Product Presentation (Visuals, Use Cases, Benefits)
Architecture and EAM Framework
Historic Data Performance Metrics
R&D Swot (Talent Risk, Key Strengths)
Traction, Learning, Insights Presentation
Talent and Organization
Hiring Performance and Efficiency Metrics
Talent Base and Pool
Organizational and Talent Development Plan
Product, Competitors and Market
Market Sizing and Segmentation Material
Customer Needs, Use Cases, Pricing
Product Overview, Features, Capabilities
Talent Benchmarks and Insights
Scale up plan (incl. promotions and restructurings)
Competitor landscape, positioning, battlecards
Market shares and growth analysis
Financial Plan Organization, Processes, Key Men, Tools)
Scenario Planning
Financing Sources and Uses
Human Resources Plan
Comprehensive Financial Model / Op Model
Capex, R&D and Project Plan (Investment)
Corporate Strategy
Acquisition Plan
Divestment Plan
Long Term Vision / Strategy
Corporate Development / Expansion Plan
Go-To-Market and Execution Plan
Innovation and Restructuring Plans
Part 2: Marketing Material / Management Presentations
Should be part of any internal processes to keep resources
aligned and focused or documents needed for managing
the operations of the business.
Part 3: Analytical and Data Back Up
Material to back up claims in the marketing material and
relate it to facts. Also material supporting investors
understanding investment case and preparing docs.
Company Research
Primary Research (Surveys, Customer Interviews)
Analytical Spreadsheets (based on CRM/DWH data)
Hiring, Sales, Marketing, R&D process analytics
Customer Insights (Features, Needs, etc.)
Research on Market Structure, Size, Buyer Personas, etc.

M&A / VC
Process
Stages Stage 1
Preparation
Setting the goals and targets for the financing
A company naturally only obtains outside financing if it is
not capable to finance the business via its own
operations; or if the return on equity is to be increased by
using debt instrument; or if the shareholders wish to
diversify their holdings to other investors; or if the
shareholders need activist investors and their value-add to
grow the business.
To make things simpler, we assume the company raises
because it needs liquidity. And that it cannot be obtained
via debt financing. But in general, the fundraising strategy
has to look at the entire capital structure and can look at
secured debt – with liens on assets -, mezzanine or
convertible debt – common in Seed financing – or modern
approaches such as revenue based financing, where the
company pledges to repay loan with incoming revenue
before paying other costs.
So what are common goals in a financing transaction?
▪ Obtain a certain amount of cash to grow the company
towards the next milestone. Minimize the cash needed
to get there – because later the valuation will be better
and cost of financing lower – and maximize the current
valuation – as to dilute less equity.
▪ Attract a strong brand-name investor to improve
company brand towards customers, future employees
and provide credibility to banks and existing
stakeholders.
▪ Attract investors with strong network able to support
the company in attracting tier 1 capital. Either as a
generalist or a vertical leader.
▪ Attract investors with know how and network to
actively contribute to the success of the company via
hiring, lead generation and know-how support. Or:
operational value add.
The best valuations do not always come with the best
operational support. The best chance of attracting tier 1
capital is not always with the most reputable investor.
Thoroughly understanding the cost and benefit of
choosing a certain strategic option is critical to have a
framework with which to screen potential investors.
With clear screening criteria, the universe of potential
investor becomes smaller. And each individual investor
that might be relevant for the next financing might have a
different appetite for business models, market segments
and types of founders. Knowing all this helps working on
additional documentation to prepare the process of
engaging with potential future investors.
Having a clear goal also helps navigate the many potential
terms available and planning the negotiation strategy.

M&A / VC
Process
Stages Stage 1
Preparation
Example: Information to be furnished during goal setting stage (1/2)
Based on the current burn rate of the business, its goals in
growing the organization and expanding the revenue
generating part of the business and need for other
liquidity, the company first of all has to build a set of
scenarios for the business.
Based on the scenarios, a set of liquidity needs can be
computed. The needed liquidity is the first step in
preparing a funding strategy. The need can be influenced
by:
▪ Reached milestones (increase valuation and potential
size of the round and focus on growing revenues)
▪ Competitive environment (if competitors are raising
substantial cash, the company might need to grow with
similar aggression to remain competitive)
▪ Opportunity (M&A opportunity)
▪ Size of the opportunity (very large opportunities in
winner take all markets with substantial upfront cost
can raise more money)
▪ Execution skills (a higher investment ticket will be more
likely supported if the company management has
proven that it can allocate that capital and generate the
targeted return)
Based on the market opportunity, the interest from the
market in the company’s industry and business, the quality
of management, product, team, sales traction and
maturity of the business, the company may have access to
a different universe of investors with different risk
appetites, allocation goals and investment behavior. This
will also impact how much money the company can raise.
And the range of liquidity needs should reflect that reality
of the business.
Finally, the overall liquidity need and access to different
segments of investors will impact the overall story of the
business. If the company is not able to attract tier 1 capital
willing to invest substantial money in a highly risky but
extremely upside-looking opportunity; and instead has to
raise money from rather conservative investors with little
risk appetite and less money to allocate, the story of the
business and the marketing material to be prepared
naturally has to be a different one.
The very same is true if the company is aiming at raising
money from family offices, strategic investors,
entrepreneurial funds or banker-run funds. A good
founding team is aware of the nuances that underpin the
reasoning of their potential investors and plans funding
accordingly.

M&A / VC
Process
Stages Stage 1
Preparation
Example: Information to be furnished during goal setting stage (2/2)
After having an overall goal for the fundraising, having
prepared a reasonable range of potential size of the raise,
having aligned the potential scenarios with a realistic
expectation of attracting certain investors with a certain
investment profile, it is time to prepare the relevant
documents unique to the upcoming transaction.
One key question is called the “sources and uses”
presentation. Investors want to understand what they
invest in, where the money will come from – themselves
only or will there be other financings alongside ? – and
what the money raised will be used for.
This is not yet about milestones, but about how the money
is used beyond the current operating cost and burn rate of
the business.
Typically, it is very simple to set up a list of potential uses
of the investment money. The typical go-getters are:
▪ Fund further research
▪ Fuel the growth (invest more in marketing and sales)
▪ Expand into new territory (by setting up new partner
and sales channels and offices)
Not very common are e.g. increase of salaries and bonus
payments to executives. But this is also a typical issue in
planning the uses of funds.
The planning of uses of funds is then to be detailed out in
the business plan. Assuming the business is well run, any
expansion of business activity requires more people, new
cost items around those people. The business plan shows
exactly that. Which people need to be hired, why the right
people are hired, what these people will do.
The business plan is the foundation for the investor to
understand where the company moves from known
territory to new territory, where the past performance will
be changed by these changes and why these planned
changes will likely work and deliver the results.
In practice, the business plan is not one document, but a
collection of documents which includes a detailed financial
plan alongside supporting documents on future growth –
e.g. sales, marketing and R&D data – and various strategic
and tactical plans. So most is covered in the financial
model alongside PowerPoint slides on strategy,
accompanied with historic data, research and other
supporting documents that increases the credibility of the
plan.
A well prepared fundraising included scenarios and also
looks ahead towards potential exit plans.

M&A / VC
Process
Revenue in the Business Plan: The Hypergrowth Business Plan Logic
Historic Cost Base
Shadow Pipeline that could convert if the
business had a product to sell
Historic Cost Base Historic Cost Base
Cost Expansion
Additional growth triggered by
cost Expansion
Growth with additional learning and no
expansion of the cost base
Pre Investment Slow Growth Case Growth Case / Base Case
▪ Business plan assumes that historic growth has been achieved under tight budget constraints
▪ Business also would improve growth rate by simple continuing operations due to organizational learning
▪ Lifting cash restraints would boost growth even more:
▪ More cash into marketing and existing sales resources would grow the business faster
▪ More cash into marketing and new sales resources grows company even faster
▪ Bringing in new seasoned hires increases the growth rate even more
▪ Goal is to show super-linear growth compared with expanding the cost base
Investor Problem: In this scenario, the historical metrics and performance can be use to estimate a base and
growth case. The only risk is estimating the impact of the cost base expansion and the actual market size
and the segments into which the company can grow. Most risk is execution risk and competitors.
Historical metrics
indicate growth path
and cost expansion
must explain growth
boost

M&A / VC
Process
Revenue in the Business Plan: Pre-Product Pre-Revenue
Historic Cost Base
Shadow Pipeline that could convert if the
business had a product to sell
Cost Expansion
Additional growth triggered by
cost Expansion
Product released and pipeline converts
into sales.
▪ Company does not have revenue but has been able to build a sales contact data base and have lots of discussions with potential customers,
some customers signed letters of intent and even offered to finance the product development. The shadow pipeline of potential sales provides
the reason for a growth case
▪ If the company gets the product financed, it will magically convert the shadow pipeline into sales and grow aggressively from there.
▪ A fundraise is hence focused on both building the product and expanding the shadow pipeline while increasing the learning of the
organization. E.g. lower cost per contact/lead via marketing activities to populate shadow pipeline. And more leads in the pipeline
can be pushed to “waiting for product to finish and will buy” stage or “letter of intent signed” or “service already prepaid
Investor Problem: Assess the risk of the shadow pipeline. Base and growth case can be created by assuming ongoing improvements in the
sales pipeline build up and that a reasonable amount of customers will actually convert.

M&A / VC
Process
Revenue in the Business Plan: Post-Product Pre-Revenue
▪ Company did not convert any sales leads
▪ Now argues that this is only a matter of time till the organization finds product-market fit
▪ It could even find product market fit by having more cost to finance a better team and spend more on marketing and sales
Investor Problem: It is very hard to estimate a growth, base and death case with absolutely no valid historical data on customer
conversion. If the company is older than 1 or 2 years it is very hard to justify that there are no LOI signed and no customers
converting. If the product is out, there is really no reason to believe that there will be product-market fit coming in the future.
The only reasonable way into such a company is aggressive hostile negotiation, and believing in a turnaround case by bringing in
new hires that know how to validate the market quickly before pulling the plug.
Historic Cost Base
Shadow Pipeline that did not convert
after the release of product
Cost Expansion
Conversion might kick in
after restructuring
Shadow pipeline might grow, but still not
convert into sales
Company should raise
with strong pipeline
before release of
product

M&A / VC
Process
Stages Stage 1
Preparation
Choosing whether to engage advisors and choosing the right one (“Engagement Letter phase”)
Some founders start early to engage advisors to support
the fundraising efforts. This can have the benefit of
reducing the overhead on management going into fund
raising and it can bring substantial outside knowledge
onto the table.
At the same time, having an advisor can prove challenging
for the cash position of the start-up and can bear the risk
of losing access to some investors. Namely, some
investors do not appreciate that someone outside of the
company will take a potentially substantial portion of the
cash raised in the transaction – although this is normally
not an issue -; while some understand that the presence
of an advisor can (a) slow down or harm the investment
process, or (b) make it harder for investors to gain the
upper hand in the negotiation and hence they will face
less favorable terms.
In general, there are three types of advisors that a start-up
can attract.
Business Angels: If chosen well, a business angel provides
additional capital, at a fair valuation and brings a
substantial network and his know-how to the table. So
called super-angels typically do not eat away too much
from the cap table, can introduce a company to the must
suiting investors and also provide extensive support in
preparing the company for the fundraise and the market
in which it operates.
Placement Agents: Placement agents are firms that
professionally source new investment opportunities to a
set of investors. They usually know what the investor is
looking for, have a good relationship and hence can help
the company attract investors and prepare the companies
to handle the interaction well.
Sell Side / M&A Advisors: They are the classic investment
bankers that bring several skills onto the table.
a) They know how to find, highlight and story tell the
core strengths of the business. Sell side advisors have
an abundance of experience of creating convincing
marketing material for the clients they advise.
b) They know how to run a complex transaction with
multiple bidders, a disciplined framework for driving
the negotiation and
c) They also have an abundance of know-how about how
to prepare data rooms
All three types of advisors can help and hinder the effort
of raising capital. Most of them come with a specialized
network and expertise and can steer the company into a
particular direction.
The legal document on this stage is the “engagement
letter”.

M&A / VC
Process
Stages Stage 1
Preparation
Building and running an investor pipeline
It is in general a good practice to start building
relationships with potential future investors early on. This
can help the investor understand how the company is
progressing and can help the company identify investors
who take the long-term view on both the relationship and
their interest in the sector.
But despite having to continuously network and build
long-term relationship with investors, the fundraising
process needs to go a step further. The goal is to build the
largest possible universe of potential investors and ideally
attract several investors who are willing to enter a bidding
for the financing round.
This will drastically increase the chance of finding a good
investor that is willing to attract at competitive terms. It
also reduces the risk of running out of options and
entering a hostile stage of fundraising where cash
requirements give the investor an advantage.
In general, building a pipeline is similar to lead generation
in sales. Several resources are available for this:
▪ Databases such as CrunchBase, pitchbook, capital IQ
and other financial market data service providers can
help you identify suitable investors
▪ Additionally, lots of Google Sheets and ecosystem-
related lists provide comprehensive overviews of
different investors
▪ Using LinkedIn Sales navigator and automation tools
like Linked Prospect can help add a lot of new investors
to your LinkedIn network which then can be engaged
via direct message or pushing valuable content into
their daily streams
▪ Local business associations, as well as investor and
angel networks can help route the company in front of
the eyes of investors.
After building a large database of investors, the next step
is to (a) build filtering criteria, (b) build engagement
strategies to be used in the outreach, (c) improve research
capability to identify what separates and qualifies
different investors.
This is very similar to building a sales process, collecting
data to populate the screening database and doing
confirmatory prospect research.

M&A / VC
Process
Stages Stage 1
Preparation
Starting the campaign: Outreach and “Origination”
The ability to generate buzz, get coverage in relevant
media, be invited to pitch events and being participant in
awards can be as vital as having a solid sales campaign
running and should not be overlooked.
But beyond buzz and campaigning to market the company
as an attractive investment opportunity, the remainder of
the fundraising origination process is similar to an
aggressive sales campaign. A large pipeline of potential
investors needs to reached and targeted via several
credible channels and the exercise is more of a
persistence and volume game than a cherry picking
exercise in a field overflowing with ripened cherry trees.
With good preparation, the right sales mindset and by
following a strong process, the process should be as much
as oiled machine as the sales organization itself.
It goes without saying, that before starting a campaign, all
publicly visible marketing and PR documents should be
aligned well, all public databases and touchpoints in the
search and evaluation journey should speak the same
message and the company should look vital and potent in
its activity in news, media, content websites and the
ecosystem in which it is targeting investors.
With no relevant cash flow or measurable investment
yield and given the high level of competition for good
capital, messaging and “hotness” is a crucial factor.
On the next slide, we show some activities that are typical
for a fundraising campaign. Without being exhaustive.
After having all documents prepared, goals defined,
business plans ready and a large database of potential
investors aggregated, the company has to switch from
being invisible to visible.
This new phase in the fundraising process is starting a
series of activities from increased PR and marketing
activity, to penetrating the ecosystem with messages
about its value and place in the world, to actively and
passively signaling that it is open to take in capital from
outside investors.
While good relationship building with investors does not
know fundraising timelines and should be an ongoing
process, the big bang for starting and finishing a successful
fundraise runs like a product release and big marketing
and sales campaign.

M&A / VC
Process
Stages Stage 1
Preparation
Types of Activities in an Origination Campaign
Active Strategies by company management:
▪ Indirect approach via the personal network and
network of business angels, lawyers and advisors
▪ Going to relevant investor conferences, pitch events
and industry events with investor presence
▪ Direct cold approach via phone, e-mail, LinkedIn or
visiting the office of a potential investor
▪ Sending a teaser to the deal flow inboxes of investors
▪ Asking personal network to give a warm introduction or
reference before reaching out cold
▪ Roadshow: Investors are approached with teaser
information and informed that the company will be in
town. Asking for potential interest in either visiting a
private event for investors (e.g. in the evening) or
asking if interested in being visited by the company
Passive Strategies:
▪ PR and marketing campaign, blog and media features
to increase coverage and organic deal flow
▪ Spreading the word among employees, advisors,
customers, ecosystem that the company is moving
towards a fundraise
▪ Associated product release and marketing around
release and success of the product
▪ Populating internet information to make the company
transparent and discoverable (e.g. Crunchbase,
DealRoom,Pitchbook,Bloomberg, etc.)
▪ Ramping up general media activities such as thought
leadership, developer blogs, customer insights
campaigns and anything that makes the value
discoverable during screening and search phase of the
investor
Advisor Activities:
▪ Sending out Sales Development Letters (SDLs) into their
own network, which typically include summary teaser
information and a request for information (are you
interested?). Sometimes without naming the company.
▪ More complex is a Request for Proposal (RfP) where
the funding round is addressed and the ask for interest
in bidding and making a proposal on how to proceed is
attached.
▪ A direct personal approach aiming at getting a phone
screen / interview to discuss the opportunity
▪ Preparation of a roadshow or investor webinar with
associated PR campaign on relevant channels
▪ Triggering of own database and company network to
generate reach for the above campaigns

M&A / VC
Process
Stages Stage 1
Preparation
Cold Campaigns: Sales Development Documents
Sales Development Letter
A written one-page document outlining the company
One Pager (+ Disclaimer / NDA)
A one page document with very small font summarizing
the company (Market, Product, Team, Financials)
Teaser Presentation (Short Deck)
8 – 12 page slide deck. < 15 seconds per page read-time
Pitch Deck (Short Deck)
8 – 16 page slide deck. < 1 minute per page read-time
▪ Used for cold outreach to unknown investors
▪ Easily forwarded by partners to their clients
▪ Cold / semi-warm outreach to suitable investors
▪ Ideally too little information to disqualify the company
▪ Goal is to get an introductory call with analyst
▪ Usually send around by investment banks
▪ Similar to letter, but more visual (bank needs to earn its fees)
▪ Mostly cold and breadth oriented outreach
▪ Can be used instead of teaser
▪ Should be used only if potential fit is clear
▪ Might help getting more senior employee on phone
LinkedIn Message
< 80 words short introduction to tease potential investor
▪ Elevator format, also works in elevator and on phone
▪ Typically uses standardized forms
▪ Can be automated via LinkedProspect

M&A / VC
Process
Stages Stage 1
Preparation
Cold Campaigns: Roadshow, Pitch and Event Formats
Presentation Deck (1 Minute)
3 – 5 Slides summarizing vision, product, value, team
Presentation Deck (3 Minutes)
4 – 12 slides talking vision, value, product, market, team
Presentation Deck (15 Minutes)
8 – 15 slides extending on market size, opportunity, customers
▪ Relayed by talk hosts or in short intros
▪ Listener should be able to repeat the message next day
▪ Gives on unique insight, aims at getting a “makes sense”
▪ Let’s audience understand the problem and identify
▪ Makes audience believe in team and product
▪ Be memorable, create emotion/excitement
▪ Sells the appeal of the business idea and passion of team
▪ Summarizes the market and investment opportunity
▪ Typically has to capture a clear audience
▪ Gives the complete idea that total business is sound
Elevator Speech
< 80 words short introduction to tease potential investor
▪ Focuses on market insights, expertise, know-how
▪ Tells story about why the business exists and can succeed
▪ Gives perspective to the audience based on experience
Presentation Deck (30 - 45 Minutes)
10 – 20 slides covering appeal for audience
(industry events, larger pitch sessions, corporate
networking)

M&A / VC
Process
Bonus Material: Meanwhile - Educational work investors did and do before and during the initial contact phase
What activity will a potential investor have done in your space?
▪ Collect research: from broker research to
▪ Collect quantitative data: such as funding rounds in the sector, who invests, which
valuations, what are features
▪ Create sector coverage reports: this includes overviews of interesting deals, market
landscapes showing the structure of the industry, clustering different technology
segments and understanding active investors. The reports also focus on market
size, growth rates of various segments, relevant features of the market (winner
takes all vs oligopoly) and also might cover active strategic buyers to understand
the exit environment
▪ If there is a deeper interest in the sector, the company will welcome and actively
source opportunities in that segment and will perform screenings, first stage
investment activity – calls with founders, collecting pitch decks, building a network
to experts – and will actively communicate interesting deals with their own
network of investors to be considered in syndicated deals and probe for general
interest in the sector
In summary, the investor that is actively bought into your domain will slowly built
expertise in the domain of your business, know who will invest in which stage, what
potential exit channels are, what common characteristics of an attractive investment
are, who is sourcing in which ecosystem, who is syndicating with whom and what the
general market perception on a particular new business is. It is very likely that such an
investor will have you on his radar by the time you are ready to raise funds.
At the same time, investors who do not have you on the radar might start the above
process the moment your pitch deck is coming into their reach and they will typically
take one to two weeks to get up to speed and see if there is any interest in having a
phone call.
The Suitable Investor
A potentially interested investor will likely not get driven by excitement by
your outreach and start researching your sector, the business opportunity.
This only happens in the rare cases if the numbers provided to the
investors are truly exceptional.
Instead, the investors reacting to a campaign already have a need of
finding investments such as yours and started preparation beforehand.
Initiating Coverage – Sources of sector interest
There are many reasons why an investor might get interested in the sector
and space of the company. In Venture Capital, common reasons are the
following:
▪ Deal activity in the sector has gone up in general and investor started to
analyze what is going on in order to follow the herd.
▪ The investor actively listens to his network of founders, other investors,
corporate clients and limited partners and understands there is a
potential market need.
▪ The investor actively follows technological developments in a certain
market and derived the thesis that a particular technology segment will
be interesting to be covered in the portfolio (e.g. Blockchain, A.I.)
▪ The investor – mostly analysts – found the time to conduct a thorough
analysis of the industry. A structural analysis of how the sector is layered
from infrastructure technology to commercial applications and has
identified a gap in the market that he now believes will be served at a
particular time.
▪ Some investors have funds “themed” around a certain topic and try to
cover all activity in this sector. (Cyber Security, Marketplaces)

M&A / VC
Process
Bonus Material: Regular Activities of Venture Capital Investors that happen outside of deal work
Sector Coverage
Collect and Study Market, Sector and Industry Research
Broker and Analyst Research, Gartner, Forrester, Landscapes and many more material is collected to study the
industry landscape, its structure and dynamics
Collect Sector Financial Information
Growth rates for the entire industry, the technology trend, different segments in the industry and studies on
key trends, outlook and expectations on where the industry is going
Build Technology and Research Know-How
This ranges from studying the supply chain and cross-relations of different technologies and companies to each
other. This can end up in a sector landscapes and white papers of particular technologies (e.g. A.I. models)
Touching down with the herd / other investors
Companies typically have a network of other investors, e.g. companies with which they co-invested, people
from the sale school, to touch down on trends, discuss companies in the market, share deal flow and in general
form a joint opinion of what could be an attractive investment. Investors also discuss if they want to jointly
invest or not.
Building a network of Experts
From touching down with leading analysts via LinkedIn to having educational calls with brokers, industry
analysts or expert on platforms like DLD, to going to industry events, and talking to experts in their existing
portfolio, prior portfolio or even executives and experts from their Limited Partners or customers of their
companies. Those experts come in handy when discussing risks and merit of a particular deal and tying up due
diligence workstreams.
Deal flow and Pipeline Work
Finally, investors also start actively looking for potential investments and review incoming deals on a regular
basis. This allows them to get a better feeling of the quality of management in different companies, how
companies in the segment understand their competitive environment and where they set their focus in
growing the business.
Thesis Development, Fund Set-Up, Commencement of Operations
Building a thesis on how markets develop and where to look for value
Some investors create specialized funds to invest in a certain vertical and will try to source a set of leading
companies in the sector. Others will try identify leaders in a more widespread set of verticals but are focused
on a certain geography. While again others try to find the top performing companies in any industry and
geography and aim at being competitive in winning bids for investing in the company.
Building a return model
Some investors want to get in as soon as possible and as cheap as possible and simply hope the investment is
then taken in by a larger and successful fund. Some companies aim to pump up the revenue after the
investment and will try to build a network of buyers in their segment to aggressively market the companies
products. Others focus more on venture building and focus on optimizing the portfolio of the company. Hoping
in can become stable in its growth and will find any potential follow on investor.
Some also are aggressively geared towards IRR returns and try to find companies they can exit very quickly in a
very short time. Others try to focus on distressed investments and focus on turnaround by introducing new
management, financial engineering and new customers.
Diversification vs. high conviction portfolios
There are funds that invest into 50 companies per partner. But usually a fund takes in up to 25 companies and
has a maximum of 6-8 companies per partner in the company. Large portfolios are more common in Seed
stage.
Fund Sizing and Allocation Strategies
The next step is to size the fund. A 50 million fund investing into 25 companies can invest 2 million per
company, with maybe 1.3 million initial investment and 700k for bridge and follow-on funding. If targeting 15%
in the company, a 1.3 million investment has a 8.6 million pre-money valuation which at reasonable multiples
on revenue would be a Seed to Series A level company. A 500 million fund investing in 25 companies would
invest 20 million, maybe 15 million in first closing. And that would be in a Series A – Series C stage.
This is critical. While the stage may be earlier when using convertibles, or later if syndicating with other
investors, this allocation strategy that is implied by the fund size does dictate what type of company the fund
will look for when it comes to stage.
The stage is not only defined by revenue growth rates and current revenue and cash demand, but also by the
age of the company. A 40 year old company with 1 million ARR would not be a Series A target pick, a 2 year old
company with 1 Million in revenue would likely be.
Chances are if you are reading this presentation, you are not in the tier 1 or tier 2 category of founders and you have a higher chance of dealing with the “remainder” of funds. So we
look at these funds in more detail. The entire overview focuses on these type of investors and how to fundraise with them.

M&A / VC
Process
Bonus Material: Different Investment Models have focus on different Activities
Data-Driven models (benchmarks) and Operational VCs
Tracking Venture Capital Deals and Paid Premiums for the Financially Focused Investor
Investors are both herd investors and rely on other investors being herd investors. By tracking current
investment activities, investor identify which sectors and companies currently get funding. And by tracking the
development of paid multiples, companies get information on where investors see growth potential. It also
helps making prediction about where liquidity is going ,e.g. in Seed Stage right now. If investor networks are
aligned, this liquidity might move to later stage as the cohort of investments matures into later stage.
Tracking CAGRs, Gross Margins and other Multiples for the Business Model Focused Investor
Companies can track financial data and metrics for both mature companies – e.g. tracking an index or
technology segment -, as well as freshly IPO-ed companies, as well as using their own deal flow to track
financials of the companies pitching.
In addition, benchmark data exists on payroll costs in most geographies and is based in specialization and level
of experience of employee, which typically intersects with titles. LinkedIn offers comprehensive data over how
many people are working in which function at which company and what education and experience bring. This
together with the fact that prices for infrastructure – e.g. AWS – and suppliers are fairly transparent, can be
used to build benchmark data on margins.
In addition, sector CAGRs can be decomposed into fast, medium and slow growing sectors and growth revenue
growth rates by different stages can be benchmarked. In summary, a data driven investor can derive
reasonable benchmark data on how a good looking, bad looking and medium looking company looks like in
different stages. A popular example of providing such a benchmark is found here : SaaS Napkin
Tracking Talent Ecosystems and Talent Pools and estimating company performance based on founders
A lot of good start-ups actually don’t follow the model of a young CS student developing an app and growing
the app to a billion dollar valuation. While such magic wonders are possible under the power law and more
likely in B2C businesses, the majority of B2B businesses is coming from strong biographies and teams.
Tier 1: Consider a 2nd family generation founder from, let’s say Israel, that started studying optical mechanics as
a child, later went to MIT, went through the military training and research in Israel, worked as VP engineering
in two or three top US corporations focused on optical electronics. And this person now meets a similarly
powerful founder with a pure business, VC and growth background. They both bring sufficient cash on the table
to finance the venture from Seed to IPO. They bring valuable networks into their customer segments from
consultants and bankers that took the same MBA classes. They have a good relationship with top engineers
and sales people in top US corporations and are now bootstrapping the business in Israel, tapping into research
funding and scaling the company up to 50 employees before switching the company to the US and growing it to
a target valuation of 500 million before they exit to their former colleagues.
Tier 2: Tier two again comes from a family with reasonable financial backing, went to top European schools,
worked for consulting and banking and now find a market opportunity. They grow the idea within a network
like Rocket Internet or use their own and parents network to source a set of leading angels to built the sales
pipeline. They bring the cash to finance the venture building process of the company to get to revenue and
even product market fit. They now diversify their shareholdings by raising an attractive Seed round and start
growing the company to a 200 million valuation before selling it off. Being established first time founders, they
use their network and platform to look for the next investment. Their natural choice, if they are in Germany, Is
Munich, where they can go skiing on the weekends and have a decent set of professionals. Or they focus on a
process model and go for the cheaper labor pool in Berlin.
While those examples are artificial, they give an idea that a lot of due diligence is already done by the founder
team being particularly strong. And now everybody has a feeling what that means.
While tier 1 founders mostly bootstrap the companies on their own and then market themselves to large later
stage companies to increase the speed of building the company and getting some network and operations
support, tier 2 or lower founders typically are looking to find the right entry investor to put the company into a
certain trajectory or market. The remainder of Seed investors and funds is focused on the less experienced
founders. This is also why investment bankers typically are terrible Seed investors. Tier 1 and Tier 2 avoid them,
and everything else below needs operational support rather than financial engineering.
Taking the Myth out of “Strong Founder Team”
Venture Development and Scale Up Network for the Activist VC
Rocket Internet is probably one of the best known brands for providing a platform for venture building. The
company which is mostly having an abundance of ex-consultants in its rank is obsessed with generating
presentations about processes, architectures, best practices, to do lists around ideation, validation, structuring
and executing business ideas. And providing an IT architecture that fuels the companies with the ability to
collect and analyze data to fine tune the go-to-market and scale up process. In the US, the concept of having
seasoned Venture Partners, specialists in different domains or people that spend all their day building sales,
hiring and financing contacts for their ventures So these models collect benchmark information and build
talent, sales and investor pools – which they also benchmark – to offer a platform for their start-ups to grow.
If these platforms find great passionate entrepreneurs that are willing to run the marathon of building a
business, and they can finance, operationally build and even market the products of the companies, that is an
easier way to success than having a young team try to seek funding from risk-averse angels and slowly have the
founders hire talent using limited brand, venture building know how and financing in the hope to grow the
business into a success.

M&A / VC
Process
Bonus Material: Investor Process in the Screening Phase – Timeline: 1 day to 4 weeks, Commitment: low
Initial Quick Research
Try to relate the company to the research of the company (Analyst Work)
Where is it in the landscape, how is the industry growing, what is the first idea about the prospects of the
company
Look at the deal flow pipeline (Analyst work)
Any related, similar or competing businesses already in the history of deals that the company screened? What
was the historical look at the segment? What might be different about the company
Anyone else seeing this opportunity? (Associate and Partner Work)
For example, associate asks via WhatsApp group if anyone has heard of the company. Or partner might already
heard about the company from another investor. Or if anyone knows the founders.
Pre-Screening of the Investment (The 3 Minutes Check / Address in SDL)
Vertical and Geography Fit
Is the vertical of the company interesting to the investor or part of its investment strategy? Geography, too?
Allocation Fit
The first question is if the company has the means to place the desired amount of cash, e.g. if the fund invests
1 – 2 million at a 5 to 10 million valuation, that is the first question to ask.
Metrics Check
How old is the company, what is the current revenue, burn rate, size in headcount, revenue growth rate
First Impression fit
Who are the founders, how do they communicate, is the material focused, how quickly can I understand the
material provided and pitch deck. Is this something that could be interesting to look at?
First screening of the business (if providing a first pitch deck, otherwise analyst requests)
Already allocated?
Is the company currently already invested in a competitor or sufficiently exposed to this vertical?
Second Impression Fit
What does Google say? Website, LinkedIn, marketing material, picture search. What is the feeling about the
quality of the material and the impression when looking at it. What is the biography of the founders?
Any open Questions?
Analyst to Associate might define list of research steps that are not yet covered by prior research to see if there
is any information missing to judge the information provided (e.g. in the teaser or first pitch deck if provided)
First Impression (Does this waste my time? Is it obviously not a good pitch deck?)
Design is sound, slides not overloaded, clear message, easy to understand what the company does, how it
differentiates and what each slide says.
Looking at the Team
Too young, too old, lacks experience, biography or story not fitting with the ambition of the business?
Business Model – Assuming product is okay
Anything on pricing, business model, market size, customer segments? Do we know and understand this type
of business? Does it check out with our experience?
Company Performance
What are we looking at? How old is the business? Which milestones are achieved (e.g. product, team, sales)?
What is the growth rate / execution rate (e.g. timeline in building business if no revenue)? What do we know
about traction? (at least some logos and company names that are currently in the sales pipeline)
Financials, Burn rate, Metrics
Any more detailed information now will be screened and quickly processed
Deeper look at product, market and opportunity
What does the product do, which problem is solved? How big is the problem and market? Does the Analyst
understand how the product solves the market problem? Does it look interesting enough to proceed?
Competitors and anything else
Who are the competitors and what else is in the deck that might be of interest?
Preparing the first internal review
Translate provided information into internal memo format and classify in deal flow system
Analyst translates key information into the memo and CRM system. Checks if anything is missing.
Fact Checking and adding supporting information from company research
Analyst compares growth rates, industry and market size and competitors with research to see if it checks out.
Maybe also enriches internal research with new information. Checks if there are open questions.
First internal review during deal flow discussion
Mostly analysts and associates, rarely partners, review the memo and deal and form an opinion whether to
proceed to next review; or if to engage with company to get back up information (via email usually)
Screening phone calls
If internal junior team wants to proceed, company is invited for a phone screen or video call to discuss the
material and answer open questions. After this, summary goes into next review meeting with senior staff.
Process continues
The process that follows can continue with data exchange and phone calls until eventually a partner takes
interest in the deal and starts to get involved more formally. That is when the next stage starts.

Stage 2:
Pre-Term sheet
Introduction to Phase 2
The moment the origination phase starts with a particular
investor, everything already is related to negotiations.
The worst that can probably happen to a sound business is
being offered a final non-binding take-it-or-leave it term
sheet and run 2-3 weeks of due diligence and close.
That is the more surefire way to walk out with a deal that
was not even close to the optimum that could have been
reached.
But the general process is slower. The offer of a non-
binding term sheet typically requires a “go” from the
investors of the fund, called the investment committee.
To get there, the Stage 2 process needs to be executed.
During the time from first contact to the investment
committee meeting and the issuance of a term sheet, many
things are happening. The typical steps are – without being in
that order:
1. Indicative Term sheet: At some point in the process, one
party will offer a framework for the term sheet
negotiation. Typically the investor offers his standard term
sheet with indicative numbers as a basis of discussion.
This can be rejected and an alternative one can be
presented. The indicative term sheet gives a framework in
which discussions on investment terms can take place.
2. Pitch deck and Pitching: A pitch deck and usually some
financials replace the “information memorandum” in the
M&A process. It is an extensive coverage of the business
and the investment opportunity.
3. Process Letter: A letter by one party that outlines the
timelines from the initial discussion to the offering of a
non-binding term sheet/bid to the preparation of the
final bid and closing of the transaction. It also covers
expectations on data to be exchanged and activities to
be performed. Does usually only exist implicitly in a
venture capital transaction.
4. Data Exchange: Period of extensive exchange of
documents, conduction of interviews, sometimes on-
site visits (usually after the term sheet in the actual
due diligence) and joint efforts in creating a strong
business case for the investment while working on the
term sheet.
5. Other activity: Other activity includes sometimes
running parallel bids and structuring a syndicate
around the lead investors making the bid.

M&A / VC
Process
ICData ExchangeIndicative TermsProcess LetterPitch deck
Stages Stage 1 Stage 2
Pre-Term sheet
Stage 3 Stage 4 Stage 5 Stage 6
The Pre-Term sheet stage starts with first contact and deals with the process up to the presentation of a non-binding bid.
The Information Memorandum = Pitch deck + Financials
Typically one of the first steps in the early stage of the
relationship is a request for a first set of standard
documents. Typically this includes a pitch deck and will be
followed by requests for financial data.
Unlike the SDL information or teasers in the outreach
campaign, the pitch deck should already include more
detailed information on the company such information on
past performance, achieved milestones, current team as
key resources, product stage and pictures and description
and both information on the fundraising and a look into
the future. What can this company be and where does it
want to go. As the name says, it is a “pitch” deck, and it is
expected to be aggressive in its projections. The company
has to sell an optimistic and achievable – and defensible –
growth case.
The pitch deck and the information requested throughout
the first discussions, alongside phone interviews are in
essence replacing what an information memorandum
would be in an M&A transaction. The process is just
different because the forecasts are not based on historic
data, the projections in general are not realistic and all
data provided to the investor could eventually be based
on nonsensical assumptions and reflect the result of bad
work.
Instead of requesting a comprehensive information
memorandum and doing follow up confirmatory calls
before opening a data room, the start-up process is more
focused on nice to understand and well-crafted marketing
material that has to shine on story – e.g. the pitch deck -,
analytical rigor – e.g. the financial model – and has to be
backed up by good defense in the oral pitching meetings
and the data requests during the data request phase.
But apart from imitating the M&A process and being a bit
simplified in comparison, the pitch deck and the active
pitching serves other purposes:
First of all, the personal meetings are important to
understand the founders. Are they on top of their business
and can defend it. Are they good communicators and
charismatic. Does the team present as one team that is
highly motivated and does it tell the same convincing
story.
Secondly, the more “agile” process allows the investor to
collect information to confirm his research and prepare
the investment memorandum for its investment
committee.
And lastly, the dynamic and tone between the participants
allows everyone to judge who is pulling the strings in
which direction.

M&A / VC
Process
Bonus Material: Example of Documents Requested From Pitch to Data Exchange
Pitch Decks / Presentations (Early Phase)
Teaser (< 12 Pages)
30-45 Minute Management Presentation (< 40 Pages)
The comprehensive business presentation (< 120 pages)
Management Presentation (Drill Down Material)
Customer Segments and Use Cases
Sales and Marketing Process and Organization
Product Overview and Capabilities
Competitors and Market Structure
Technology Presentation (Operations, Architecture)
Executive Team and Organization
Financial and Business Model Presentation
Spreadsheets
Capital Structure / Cap Table
Financial Model (High Level)
Operating Model (Including plans for HR, Capex, Marketing)
Sales Pipeline Information (Aggregated)
Customer Reference Call Contact Information
Financing Round Presentation (Sources and Uses of Funds)
Business Idea and Opportunity
History and Status of the Company Presentation
Supporting Data
Market Research Studies, 3rd Party
Analytical Reviews (e.g. CAC, CARC, Efficiency Metrics)
Board Meeting Notes and Presentations
Corporate Documentation (Shareholder Agreements, Articles, Bylaws)
Disclosure of Material Contracts, Debt Instruments
Discussion of Exit Strategies
Audited financials
Overview of Key Advisors and Consultants
Overview of Personnel, Freelancers, Partners (Sales, Distributors)
Strategy and Go-To-Market
Comprehensive Risk Assessment and SWOT
Detailed Plans on Liquidity, Capital Investment, Working Capital and other
financial planning back-up

M&A / VC
Process
Pre-Term sheet
Moving from sending information to understanding motives and discussing joint creation of value
Investors, as we discussed earlier in this presentation, all
come in different shapes and sizes and with different
motivations.
Apart from understanding where the fund comes from –
fund sizing, investment allocation model, fit of company
stage to the fund -, it is also important to understand what
the thesis of the fund is how he can make money. Because
ultimately venture capital investors manage funds that
invest other people’s money. They all need to find a way
to return this money and a lot of surplus.
While some founds are government backed and hence
have a higher risk tolerance and a lower return focus,
most funds have a unique model they use to generate
returns. Some focus on diversifications, some invest in
growth winners in a particular vertical. Some invest in
potentially hyper scaling 1000x companies. We discuss
this in the bonus material on the next pages.
The investment thesis typically requires skills, networks
and resources outside of the fund. Some funds want to
connect validated businesses to as many corporate
customers as possible. Some hope to get more results by
bringing in new hires. Some just give the company money
and hope something will come out of it.
It is important to understand that there are many different
funds out there. And it can help understand the investor if
you have a dedicated framework for discussion the value
creation process after the investment. We also have
another slide in the following bonus material pages that
discusses an example framework. Using this framework to
discuss where the investor thinks value will be created,
and moving from discussing “potential” to how to actually
create this value – e.g. by discussing the number of leads
the investor will bring to which type of customer in which
month after the investment – can greatly help (a) build a
relationship with the investor, (b) probe if the investor is
actually able to discuss or willing to contribute the
resources that will create the value, (c) understand if the
investor is focusing on this kind of value channel and, last,
but not least, (d) if he cares at all about adding value or if
he is only investing out of opportunistic reasons.
Of course there are more sizes and shapes of investors
and there are more frameworks to discuss value creation,
but the provided examples hopefully help in
understanding the problem and thinking about how to
move from sending pitch decks and selling an existing
business case to building a business case that is focusing
on co-creation of value.
Hope this helps.

M&A / VC
Process
Bonus Material: Investment Thesis
Conviction Financial Return : 1000x Investors
Stand Alone Growth
Investors expect the company to grow without external help and
see a strong overall company on the path to success. It is very
likely that the profitability and market position is attractive for IPO
or a strategic investor.
Value Add Model will increase growth
Customer and hiring network fits the company very well and can
be used to drive the revenue building and operational
improvement after the investment. Investor can invest pre-
improvement and gets a bargain. Investor is sure there will be
follow-on financing and the same logic as the stand-alone model
gives.
Capital Intense Business with Attractive Defensible Market
Position
This is the old-school venture capital case. The initial investment
to build a defensible market position requires substantial upfront
investment into R&D (e.g. Google Search Index) or into the asset
base of the business (e.g. scooter). Only limited amount of
investors are willing to provide the capital and the potential for
profitability and cash flow is substantial. The market position will
be major, the market is huge, the position can be defended from
new entrants and old
Hyper-Speed Winner Takes All Market Grab
The actual technology or product might not be capital intense, but
the market requires substantial marketing and sales activity to
build a strong position in the market very quickly. Network effects
provide a winner takes all market and the position is highly
defensible. Examples include Facebook, Twitter, TikTok, Instagram,
LinkedIn
Conviction Financial Return: 100x Investors
Opportunity Funds : High Conviction
Early Stage Investment in potential Mega Investment
Small Seed or early stage investor invests into a company that
might not reach its milestones with the investment, but might
catch interest of very large investors that will then lift the
valuation and return the money. Ideally the larger investors
will buy the existing shares early on via a secondary sale.
Quick Flip Opportunity
Company is already grown substantially and could attract M&A
investors. The founders might be willing to sell but want to
maximize the exit valuation of the company by bringing in new
investors. New investors might open new strategic accounts,
provide a stronger brand value. If the current valuation of the
financing is still far below the potential purchase value of the
strategic investor, the investor can capture a decent money
multiple in a very short time frame which will boost the
investors IRR.
Sector-Thesis Investment.
Some companies build their cases by promising their investors
to offer an exposure to a particular sector and to invest into
the top performing companies within the current generation
of companies in the target stage. Let’s say there is a new
development in Internet of Things technology. The majority of
new companies bringing in new technology into the market is
expected to launch in 2020. So in 3 -5 years time, the most
promising ones will emerge to raise Series A funding. The
investor raises a fund with the goal of investing at least 20% of
this fund into the top performing companies in this segment.
Giving access to its investor to the new technology segment
and maybe being a bridge building for future M&A activity.
Diversified Investment Strategy
Holistic Venture Asset Class Investors
Goal is to offer a diversified exposure to top companies in to
growing verticals and sectors. A 1 billion dollar fund might aim
at investing in Series B stage into the 5 most promising
verticals ranging from pharma to software. Investing into the
strongest companies in the sector and thereby locking in a
unique return profile that suits the allocation of their
institutional investors. Return expected independently from
exit strategy. Both IPOs and strategic M&A is an option. This
strategy increasingly also fits the style of private equity funds
who buy companies to generate returns from the strong cash
flow profile of the strongest high growth companies in specific
verticals.
The 500 Start-Ups Early Stage funds
Some investors are focused extremely of capitalizing on the
power law of the venture capital ecosystem. They can range
from Seed Investors that place 150k investment bets into very
early stage companies – like Y Combinator – to investors
capturing 50 – 100 investments investing up to 2 – 5 million.
An example would be the German High Tech Founders Fund.
Also, there is an increasing number of fund of funds players
that invest into a series of early stage funds to get a larger
diversified exposure to the early stage market.
The goal is to invest into enough potentially failing start-ups to
get an early access to a potential outlier. A small set of outliers
is then returning the fund. This strategy is highly different from
the high conviction portfolio models of regular VC funds who
invest in mere 25 companies.
The special case of e.g. Y Combinator types is their proximity
to the 1000x investors and their ability to attract a high
number of potentially outlying companies.

M&A / VC
Process
Bonus Material: Investment Thesis
Strategic and Buyout Funds in Venture Capital
Deal flow Funds
Some funds promise their investors an early access to young
companies to scout and probe the market for upcoming new
ventures. The goal is usually not return driven. Rather companies
shall be guided through the early phase of market discovery and
product validation. After this stage, the companies are being
prepared for a strategic exit at comparatively low exit multiples.
Strategic Investors
An even more aggressive strategic approach is to identify
companies in the early stage to directly connect them – as
suppliers – to strategic bidders. The companies then are guided –
via board activity and investors – to develop specifically for a
strategic buyer. These type of investors may take in co-investors to
bring outside management and operational know-how into the
board and support staffing for particular operations engineering
purposes. But at some point the companies are approached for a
strategic buyout. The valuations of the buyout can be even lower
and the buyouts may happen earlier. The investors typically build a
lot of pressure on the company to accept the terms and might
even be mislead in the growth path to achieve a particularly low
valuation.
Distressed and Special Situations
Distressed Investors
If a company just did not perform well or did not raise enough
cash to validate the market, but there is still financial value to
be captured down the line, a distressed investor typically
becomes interested. Strategies can be varied. Most of the time
they support buying out existing shareholders and perform a
recapitalization (“re-cap”), provide sufficient liquidity for the
company to reach the next milestones. They typically also
come with operational support and might add executives or
even restructure the management layer completely.
Special Opportunity
A special form of distressed investor looks at distressed
investments from a strategic M&A perspective. A company
might be under control of a strategic investor or capture and
kill investor and be set-up for doom. Or it might simply be
distressed by having underperformed on its milestones.
A special opportunity investor might identify the company as a
potential M&A candidate for a rivalling strategic buyer or as a
portfolio company for a vertical specialized private equity
investor. The goal is again to structure an investment the
restructures the cap table, management and sets a defined
agenda in restructuring the business to dress it up for a
buyout.
There are also specialized funds that support current
executives in buying out the company from existing investors
and the original founders to turn the company around under
the leadership of the existing insiders and their thesis. The exit
from such a strategy could also be the return to the classical
venture capital funnel or growing the business towards cash
flow and allowing a full management buyout of the company.
Empire Builders
Building Portfolios to build the next unicorn
Especially larger funds who have experience in understanding
industry dynamics and market positions sometimes work
towards building very large companies with diversified
business segments by strategically investing into a set of
related companies. The company with the strongest growth
rate, solid and experience management and good cash flow
profile is used as the frontrunner of the empire building
process. If the company grows fast enough to have an
attractive valuation, it can use its valuation and cash flow to
buy out the other companies in the investor portfolio.
In the end, the business can enter a public listing.
Capturing Industry Leaders with attractive Cash Flow
Another simple strategy is to simply collect high growth
companies with very strong operating margins and promising
outstanding future cash flow profiles. Instead of listing these
companies, the investors – typically late stage private equity
buyout funds – merely collect the cash flow profile and offer it
to their institutional investors. They essentially offer
something like private market IPO markets. The notable
difference is the lower cost for furnishing reports; a very good
network to add new executives and improve the operating
performance; and direct control over the company which is
beneficial to carefully management the capital and debt
structure of the business. By adding debt, the funds do not
only offer stronger equity returns to their institutional
investors, but also play a vital part in a private corporate debt
market and strengthen their collaboration with debt funds and
brokers.
Capture and Kill Investors
The worst of these types of strategic investors are of such kind
that they use their fund vehicles to gain control of the company
and aim at liquidating the company. This can happen if the
strategic limited partner is in direct competition or invested in a
competitor. From destroying bidder competition and reducing
valuations and cash-intake to installing executives that work
against the company from structuring unproductive boards, the
repertoire can be big. But such funds are rather rare.

M&A / VC
Process
Bonus Material: Getting Concrete in Value Creation Discussions
100
355
40
15
60
25
45
70
Value Creation Contributors
Structuring valuation discussions around the way to value
Value does not simply come out of nowhere. Founders know this, and investors know this. An investor that invests 20
Million at a 100 Million Pre-Money wants the company to at least grow 2 – 3x until the next financing round. This
connection is not obvious by just throwing documents around. It requires a careful discussion about how both parties
actively work together to unlock this value and to get a consensus from which activities the value will come from.
Cash
▪ Cash not only supports ongoing operations but allows investments into new activities. It must return more than cash
value.
▪ E.g. investment activities need to increase the return on monthly burn. Revenue needs to grow faster based on
learnings, insights and improved operational activity
Branding
▪ A sizable investment from a reputable investor can impact the business positively E.g. better hiring opportunity, more
credibility with investors, new lead generation and contacts from PR activities.
▪ In order to unlock this value, the company has to put in an active effort of making the brand and investment visible and
valuable
Customers & Hiring
▪ New investors come with new contacts to customers. This should be discussed and negotiated. Only if the company is
ready to execute the sales pipeline and can add the value to the new customers, the investors will open their contacts
and this value driver can kick in.
▪ The same relates to hires. Only if the company is ready for new senior hires, is able to integrate them and learns from
the know-how that is brought in at the potentially high cost of employee, this value can be unlocked
Governance and Venture Support
▪ Only if founders sincerely discuss their strategies and thinking with investors, the investors can help focus the
organization, introduce new best practices and guide the company via the board. Unlocking value.
▪ The very same is true with Venture support. Investors see thousands of companies and make a living detecting best
practices and successful patterns. If a company takes this knowledge in, it can grow
All these value drivers being understood, discussed during the negotiation and by showing a good faith in unlocking these
value elements, this can both affect the investment valuation as well as the actual growth and value creation in the
business.

M&A / VC
Process
Pre-Term sheet
The Process Letter
I am frankly quite sure that no Seed or Series A founder
has ever heard of the term process letter, unless an M&A
advisor was involved.
In a typical VC deal, the process letter hides in a collection
of emails regarding (a) the timing of activity and decisions,
and (b) the structure of the data room and the list of
questions (laundry list).
From the investor side, it makes little sense to issue a
formal process letter. A start-up might not have the
resources to strictly adhere to a schedule, the letter might
reveal information about the goals of the investor and
might bind him to a process that he does not want to
follow. If there is a process letter, then it will very likely be
issued by the start-up. And it is very likely that a start-up
will annoy an investor with a process letter if it does not
have to coordinate competing bidders.
That being said, a process letter can still make sense and
can be issued by a start-up team if it is not formally a
process letter. The start-up should for its own sake have a
process letter in the back of the founders mind and strictly
communicate timelines, expectations on process based on
that letter.
So what is a process letter?
A process letter defines the process of the fundraise. From
the initial contact to the timeline for making a first non-
binding bid, to the final bid and closing and wiring of
funds. It communicates what kind of information the
company wishes to disclose in which phase of the process
and what level of commitment and collaboration it
expects in different phases of the process.
It usually also implies that non-adherence to the process
can have negative implications for either party.
Process letters are highly relevant if a company is running
a competitive bidding process or auction on its share sale.
The letter ensures that all bidding parties know by when
they have to make a decision and they can allocate
resources and budgets accordingly.
Otherwise a potentially interested investor A could rush to
making a non-binding bid, expiring within two days, and
investor B would maybe need another 2 weeks to make a
decision.
But even without the bidding contest and without its
formality, communicating a process letter by disclosing
desired timelines, and offering guidance on the process,
gives both credibility to the start-up in terms of project
management, and it shifts the power of control to the
start-up. It can then prevent premature action based on
incomplete information by itself or the counterparty.

VC Process Guide: 6 Stages to Fundraising Success

VC Process Guide: 6 Stages to Fundraising Success

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