Beyond the pitch: Moving towards the deal

So, you’ve thrown everything at your pitch. Your pitch deck was concise and compelling. You managed to get in front of a VC. You’ve done a good job of articulating to them your product, vision and market opportunity.
What can you expect once you’ve closed your laptop and walked out of that meeting?
Well, if the investor you met has an instinct that yours is a good one, things begin to move quickly. As I said in the previous post, we now need to pitch your business to the rest of the Episode 1 team, something that usually happens at our next Monday morning meeting. We’ll probably need some more information before we do that, so will usually be in touch in the days following the initial pitch meeting to flesh out what we learned and fill in gaps identified during the meeting and the many others that will pop into our brains during the percolation stage (i.e. as we sleep that night).  This always includes taking a close look at your financial model, so make sure it’s up to scratch.
We need our colleagues to see the potential we saw and to get as excited about your business as we did.  It’s important that we can answer their questions and anticipate any obvious concerns they might have.
A huge part of any decision to invest is based on the quality of the person, or people, we’ve met, as we try to gauge their potential as a successful CEO/group of execs who can build the business. We’ll also need to be confident that a sizeable market opportunity exists, ideally with some solid indications of traction and key achievements.
Hopefully, other team members share our enthusiasm and will want to know more so we’ll want to set up another meeting within a week of the initial pitch. This will be something of a re-run of that first pitch, but with context given by the first investor(s)  you met.
The outcome of this second pitch feeds back into the next Monday morning meeting and if there is general enthusiasm at that point then a real sense of urgency takes hold and things can move pretty quickly.

Our turn to sell
If this is a great business, there is every chance that there will be several options on the table for you, so this is the start of what is a sales exercise to you, the entrepreneur, as much as in the traditional way of you to us.
We’ll want anyone who hasn’t seen the business to see it and then we can work out how Episode 1 could offer the best help and support.  We do this all as fast as we practically can – yours is unlikely to be the only business at this stage of what we call “conviction building” but rarely are there more than 2 or 3 at this stage at any one time.
You’ll meet Siobhan, our in-house sales and go-to-market specialist and Anouk, our expert on talent, people and culture. Then, each of us in the team has our own areas of speciality and networks. We will start talking to our connections in the market to do some informal due diligence on the market opportunity and will often feed that information back to the entrepreneur.  We might start to make commercial introductions if suitable.
So, at this stage, you will have a sense of significant effort and activity on our side, with lots of attention and advice offered to you. As well as showing you how we operate and showcasing our expertise, this is an opportunity for us to get a better understanding of your business and of you. We’ll see how you interact with us and how you deal with what can be a quite overwhelming situation, with so much happening quickly. We learn a lot from observing how an entrepreneur and his or her team operates. After all, investing at seed stage largely comes down to making a decision based on reading various signals and collecting as much data as you can about a business.

Keeping it all on track
While all of this is going on, we will also have entered the negotiation phase, so there will be more meetings to discuss a potential deal and explain what our terms mean. We’ll also want to know who else you are talking to and discuss with you how to craft the best deal with the best investors – usually Angels and sometimes other funds. Naturally, we’ll be negotiating for the best stake we can get at the best price. Wherever the price ends up, the terms are pretty much the same for most deals as they have become pretty standard in the market now.  You can see our term sheet on our site.
At this stage we have a keen eye on the momentum in proceedings. If we perceive that we’re putting in significantly more effort than we see on your side, we regard that as a negative indication. It would suggest that our efforts are not being appreciated and that perhaps there is another, preferred, investor in the picture. Being a desirable investment target is great, but the way you handle things at this stage is important because if we invest, we’ll be building a relationship with you that will likely be a long one and so we like to see our efforts reciprocated. It’s best to get off on the right foot.
Prior to signing a term sheet, we always need to get at least one, and better two or three customer references plus a personal reference for each founder as a bit of preliminary due diligence to make sure there’s nothing toxic that could scupper the deal.

Doing the deal
If everything goes well, we will make an offer. By this time, we will have got to know each other, and an offer is the final step in a whole series of exchanges during the negotiations.  So even though this is a significant moment, it often comes without fanfare. It might be a phone call or an email with a price and valuation. What we almost always do in person is go through the terms to make sure you understand what you’re signing up to. Up until this point, most entrepreneurs haven’t had to know what liquidation preference means or what an anti-dilution clause is. There’s no real need for lawyers at this stage – the term sheet is straightforward and fairly standard, running to about three pages plus an appendix.  Lawyers get involved when this offer is subsequently turned into a much more detailed investment agreement and set of Articles both 50-60 pages long.
Once the deal is signed, it becomes exclusive, meaning you can no longer negotiate with other investors. And now the really exciting work can begin.
It’s in our DNA as former entrepreneurs that we operate an “entrepreneur friendly” VC.  It’s both natural to us but also very conscious in how we operate – which is fast, always helpful and straightforward.  So, at this post-signature, full DD stage we try to be as painless & helpful as we can be to the entrepreneur.  Our DD is being done to primarily help us understand in great detail your business (both in legal terms and commercially) and how your market operates and also to identify areas of the business which we will need to work on with you to help you get to a great Series A at the right time.  It is important to be clear that once we sign the term sheet you are committed to us, but as importantly, we are committed to you. It is extremelyrare that DD post term-sheet leads to either party pulling out of the deal.
The DD that will be done includes all the stuff the lawyers do looking into the legal structure of the business, the contracts, any IP ownership issues etc.  The DD we focus on is commercial and technical.  We will call as many customers as is practical – we are smart investors, but we aren’t your customers, and they know so much more about the market than we probably ever will, so talking to them about the market and how you fit into it is golden.  It can also be useful for you, as they will often tell us details that they won’t tell you or you won’t have had the chance to ask, and we will always endeavour to feed those details back to you.  On the technical side, we will send in a senior technical advisor to really grill your tech team (often the CTO will go on to build a relationship with that advisor such is the value of their observations and advice).  We will do some more referencing on the exec team (probably 1 more call per co-founder) and, finally, continue to do our own market research.
Once we have digested all of that we might pre-close do what we call a “pre-mortem”.  Sometimes this is done after deal close.  This imagines a future when your business has sadly failed and we visualise what caused the failure.  It’s a technique developed by nobel prize winning economist Daniel Kahneman and really helps identify key risks to the company that we have to be aware of.  And by “we” I mean the CEO and the Director – we are on your team by now.  Damien wrote about this process with Carwow – read it here.
We will also at some point around now arrange a team dinner with multiple members from both sides so we can get to know you all in a more social way.  It’s cliched, but we do operate as a kind of extended family, so want to be confident that we can get on and that you’ll be a great addition to that group.
Beyond a pro-entrepreneur approach and access to our extensive professional networks, we deliver a lot of operational support & value. We bring practical, operational expertise to bear as early as we can after the deal closes so we accelerate you on that journey to Series A straight out of the blocks.
In the next post, we’ll look at how things change when you have an investor on board and the journey to becoming a successful, high-growth business begins.

Adrian Lloyd
Half Swiss. China obsession at Oxford. Tech obsession at Stanford GSB. Strategy consulting to Venture Capital. Tennis, skiing, Cresta riding. 4 young children, a boxer. Fabulous artist wife, Print-maker.



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