The basis for talks with a potential investor is a detailed description of the company.

In most cases, VC funds

expect a business plan, though some are willing to consider a simpler document and some may require
additional financial projections, business models, etc. In each case, however, the document should present the
company, its history, ownership, products, position in the market, major competitors, development strategy,
financial results and needs, as well as the professional experience of the key shareholders and management.
More details on the information requirements can be obtained from VC firms.
VC investors are careful readers of business plans. Their initial critical approach is the first and most discerning
judgment all submitted proposals must withstand. Many projects are rejected at this point. One VC fund gives
the following example: out of 100 submitted business plans, over half were rejected after the first reading, the
next 25 after a few hours of a more detailed approach, and another 10 business plans could not withstand deeper
analysis. From the initial one hundred, only several companies managed to reach the more advanced stages of
analysis, yet only a few will successfully pass through the negotiations related to contract conditions and finally
receive capital. Therefore, it is worthwhile to carefully prepare a good business plan. Nobody wants to forfeit a
chance to get much-needed capital and waste several weeks of work only because the plan was poorly written
and the investor rejected it at first reading.
When working on a business plan, one can hire a consultant. However, persons who will then be responsible for
carrying out the plan, especially members of the board, should get involved in the work and, take full ownership
of it and show their competence. Before submitting the plan, it is advisable to put it to the test by having it
reviewed by impartial and knowledgeable persons not directly involved in your company, such as an accountant,
auditor, legal advisor, a reliable consultant or just a business friend. They can pinpoint possible errors, defects or
weak points.
When your proposal has passed through the initial stages of analysis, the investor usually asks further questions
and requests additional information. Next, the time comes for the fund’s representatives and the company’s
management board to meet. When the project is provisionally accepted, it is time to work on more details. At
this stage, the investor carries out an in-depth analysis of the company known as due diligence, which includes a
business analysis, financial and legal audits, organizational analysis, and possibly technical and environmental
investigations. It requires a great deal of detailed information whose confidentiality is guaranteed by the fund.
As venture capitalists make many investments and have a long perspective, they treat confidentiality highly
seriously.
If the VC fund is satisfied that the business is ready for investing and the future plans for the company are
agreeable between the parties, then the fund will engage in negotiations to establish the conditions of the
investment. The negotiations focus mostly on determining the
shareholders’ rights and duties, representation on the supervisory board, possible managerial options, and – the
most difficult part of the negotiations – the price at which the investor purchases a specified amount of shares in
the company. These negotiations typically go on in parallel to the investors due diligence activities. When the
negotiations and due diligence are successfully completed, it is now time to approve the decisions made.
Investment funds usually have a special body – the Investment Committee, which makes the final decision on
investments. On the basis of this decision, the parties sign an agreement and the equity reaches the company.
The investment process presented above - from the moment a company files basic documents and data until the
time the money is transferred to the company’s account - usually takes a few months. The information about the
initial acceptance or rejection of the project can be obtained after just a few weeks. Obviously, the tempo of the
process depends on the parties involved. An active attitude of the company’s owners and management board and
efficient cooperation with the investor can accelerate the process.
With the signed agreement, the VC fund makes the investment but its support to the company does not end.
For the fund, the decision to engage capital in a company means the beginning of long-term cooperation based
on mutual trust and respect of each other’s interests. The fund is typically represented in the company
through its designated member(s) of the supervisory board, and it monitors the company’s current activities
and results as well as supports the company in strategic matters. As a rule, it does not get involved in the
everyday running of the company but supports the management with its expertise and experience or provides
reliable experts in the fields of finance, strategy, marketing, human resources and other areas. After a few
years, when the company has grown as expected, the VC fund starts the process of divestment. Depending on
the fund’s policy, the company’s industry and character, and the situation on the market, this usually takes
place after 3 to 7 years, however, longer and shorter investments happen as well. As already mentioned, the
manner of the divestment is agreed upon during the initial negotiations and may take the form of an IPO, a
trade sale, buyout by the remaining shareholders or the company’s management, sale to another financial
institution or other means. This can happen in several stages or at one-time. The fund exits the company and
realizes its profit. The remaining partners can also assess how the value of their company’s shares has
increased. In fact, they often exit with the VC fund, and reap the at least the same and usually better returns
and rewards than the fund. The venture capitalist makes money if you make money.