How Do Venture Capitalists Make Decisions? - Deepstash
Deal Sourcing

Deal sourcing refers to the process by which VCs attract entrepreneurs and sort through those opportunities to make an investment decision. 

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Investment Selection

When considering a deal, VCs will look at the attractiveness of the market, strategy, technology, product/service, customer adoption, competition, deal terms, and the quality and experience of the management team.

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Give the uncertainty of most of their investments, it is not surprising that most VCs don’t really use financial techniques such as DCFs or NPV to evaluate their investments. 

Most commonly metrics used are cash-on-cash return, multiple of invested capital and net IRR. An other interesting finding is that fewer than 30% of companies meet projections.

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VCs syndicate around 65% of their investments in an attempt to share risks, build reputation, reduce capital constraints and gain complimentary expertise.

The intended goals of VCs contracts are to make sure that the entrepreneur does well if he/she performs well while providing VCs with leverage if the entrepreneur does not perform. VCs achieve these objectives through cash flow rights, control rights, liquidation rights and employment terms. 

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Post-Investment Value Add

VCs are active investors and strive to add value to their companies after they invest. 

VCs are critical in the professionalization of startups: they will improve governance through strategic guidance, by structuring the boards of directors and by helping in hiring outside managers and directors.

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