So How Fast Can a VC Run?

[Editorial Notes: Guest article contributed by Mayank Khanduja of SAIF Partners. In this article, Mayank covers a very important part of fund raising : “Why VCs/Investors take time to evaluate the deal? Why is it slow or fast?”].

Don’t worry, this is not about a fitness wearable device. Instead I want to share my perspective on the deal evaluation process at a VC. This post has been inspired by a conversation I recently had with founders of a company we really liked. Our discussions with them were progressing at a rapid pace when they asked, “Why are you moving so fast on this deal?” I think it is one of the smartest queries relating to a VC’s evaluation process– entrepreneurs should ask questions not only when a VC is moving too slow but also when they are moving too fast!

Run Like Hell
Run Like Hell

We all know of instances where funds move quickly to extend a term sheet, only to see it fall through at later stage, as some part of the due-diligence on areas like market, competition etc. was completed only later. While one cannot entirely fault the VC from backing out, it is definitely unfair on their part to extend a term sheet before completing these elements of the business due diligence, as the entrepreneur would have stopped all other fund raise conversations.

Therefore, the entrepreneur in the case sighted above was well within his right to raise the question he did. We were able to give him comfort by sharing the database of 100+ companies we had met in their space and other such detailed groundwork we had been doing.

An oft-asked question by entrepreneurs is “How long does the deal evaluation process take?” Answering this with a definitive number is almost impossible given the multitude of factors that go into the decision-making, and thus most VCs acquire notoriety for not having a set time frame.

I have seen many deals at our fund go from first meeting to term sheet in a matter of days, while others can take a few months of knowing the entrepreneur and company before extending the term sheet. Few important factors that determine this time frame are:

Hypothesis on the market

I am a believer in the hypothesis-driven approach as it allows me to narrow down my focus areas and build in-depth knowledge in them. The hypothesis can be extended to not just sectors but specific business models that could succeed. So, if a company fits well into the hypothesis and has been executing well, the process can move fast.

But every once in a while, an interesting company comes along bringing together a combination of a great team and a potentially large market, which piques my interest in a new sector. In such cases, the groundwork begins only post meeting the company and thus the process may take longer.

Scan of the current players

In either of the two cases mentioned above, an exhaustive scan of the players in the market is done. This not only covers direct competitors but also players whose business model could converge with that of the company we are evaluating. In early stages of a startup, it is often difficult to be 100% sure of the path the business is likely to take and therefore we need to build a view on who all could be the potential competitors over the next 4-5 year horizon.

Strong reference on the founding team

A large part of evaluating an investment at seed stage is focused on the team. Its always more comforting if a team is recommended from one of our portfolio founders or people in the startup eco-system that we respect. It just does a great first level filtering for us and helps move the process along faster.

All in all, a deal evaluation process is like a courtship – sometimes the magic just happens, or on other occasions love can take time to grow on you… but both could lead to long and happy relationships.

[Image credit : shutterstock]

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