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How to Evaluate An Investor Using the Venture Capital Life Cycle


Venture capital (VC) has been and continues to be critical to the growth and success of countless startups. Most VC firms create impressive funds with a plan to invest in innovative business ideas, and have a lofty goal of selling those interests at a high return after about ten years. This may seem like a fairly long time, but it is actually a relatively short timeframe considering the typical length of a lot of other investment vehicles. One of the benefits of the VC life cycle is that it can help those seeking VC funding to assess prospective investors, and it is not overly cumbersome to perform this analysis. Depending on where the VC firm is in the cycle, startup leaders can get a pretty good sense of the firm’s strategy and performance, which will of course influence whether or not to pursue an investment from it. Here is a brief look into how one can evaluate an investor using the VC life cycle:


Raising Capital

The first phase of the VC life cycle obviously entails raising the funds that will be used to create the VC’s investment portfolio. There are usually general partners who contribute an initial sum of money, but the bulk of the fund is sought from other parties. These parties may be high net worth individuals, institutional investors, or other firms able and willing to put up some money. The general partners usually issue some form of an offering memorandum to elicit interest from the pool of prospective investors. This generally contains information about the general partners’ backgrounds and expertise, as well as the investing goals and strategy. In some ways, it is not all that different from other types of fundraising pitches, at least the core purpose.


During the fundraising phase, companies obviously won’t be able to secure an investment from a VC since most of the capital will not yet be available. Nonetheless, the manner in which the fundraising is conducted, the list of partners that end up contributing to the fund, and the size of the final fund no doubt say a lot about the VC firm’s potential as an investor. Thus, startups interested in learning about a VC firm’s strategy and capital pool should try to gain as much insight into the establishment of the fund as possible.


Making Investments

Once all of the nitty gritty has been hammered out and the hopefully millions of dollars raised are available, VC firm’s will begin to look for good deals. This phase of the cycle can take anywhere from months to years, as it depends on the size of the fund, as well as the companies and industries the firm is interested in funding. More than likely, the firm will be looking to finish the investment process within three to five years to allow for subsequent growth and to ensure there is time to get a handsome return.


Obviously, this will be the time that startups in need of funding will be making connections with the VC firms looking to fund innovative enterprises, so evaluating an investor at this stage is crucial but may be a bit tricky. Startup leaders should not be afraid to ask about the VC’s existing and prospective interests to get a sense of where its dollars and resources will be going. To determine whether a VC is the right fit, it will also be helpful to look at the industries it is in touch with and the regions in which it has an office or other resources that may prove useful.


Managing the Portfolio

At this juncture, the VC firm may not be continuing to make investments and will simply be focused on overseeing its portfolio. However, depending on when it sells off interests or receives additional funding, it may well be both managing its portfolio and adding to it. This particular phase of the VC life cycle will reveal heaps of information for startups that are hoping to get an investment. After all, VC firms obviously vary in terms of goals, strategies, and commitment, but many firms will play a substantial role in the companies that are contained within its investment portfolio.


The nature of this involvement may include the provision of operational or other business advice, filling seats on the companies’ boards, and basically doing anything it can to ensure that the company in which it has invested succeeds. For those companies that are not yet part of the VC firm’s portfolio, it will be imperative to find out how the firm involves itself, or perhaps does not involve itself, with each of the companies in which it has invested and to evaluate whether and to what extent the VC firm has added value to the companies that received its funding and other resources.


Planning for Exit

A lot of entrepreneurs and investors get excited about their future exit plans before they even get their companies or investments off of the ground. Granted, the primary goal of any business is to maximize revenues, create a valuable business, and sell it at the highest price possible, but it takes quite a bit of time and a whole lot of work to get to that point. For a VC firm, the number one objective will be for the companies it has invested in to get acquired for some ridiculous sum, but going for an IPO is usually a pretty close second. Regardless of when and how it plays out, the final result will prove very telling for anyone trying to evaluate the VC investor.

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