What venture capitalists are looking for: An insider’s perspective

What venture capitalists are looking for: An insider’s perspective

This year’s Entrepreneurship 101 series is coming to an end, and as our audience members’ ventures mature, more and more of them are seeking investment. What better topic to wrap up the series, therefore, than money?

At last week’s lecture, MaRS welcomed Shirley Speakman, investment director of the Investment Accelerator Fund (IAF). Funded by the Province of Ontario, the IAF is a seed fund that helps emerging Ontario technology companies bring their products and services to market.

Shirley provided the audience with valuable information, including the model that venture capitalists (VCs) use when selecting companies for their portfolio and insider tips on what clauses should be included in your term sheet.

The model

  • For every 1,000 companies a VC meets with, only 10 companies receive investment. 
  • Of those 10 companies, only one or two are largely successful and contribute to the returns for the VC. 
  • VCs are looking for a startup to give them a 10 to 12 times return on their money in five to seven years. 

So what do these numbers mean for you?

In her talk, Shirley outlined what exactly a VC is looking for in a company, such as the “say/do” factor. She also provided personal recommendations on how to assess whether a VC is right for your company. Since this is a long-term commitment, you should be sure you’re entering into the right partnership.

The term sheet

If you find that you and your VC are a good match, the next step is to draft a term sheet. A term sheet is a non-binding offer to invest. It sets up the terms and conditions of the investment, but is subject to change.

Shirley outlined some of the basic terms that do not change, as well as a long list of terms that you will need to negotiate with your investor. She also explained some of the most common clauses you may come across when drafting a term sheet. These include:

  • valuation;
  • intellectual property assignment;
  • an employee stock option plan; and
  • anti-dilution.

The term sheet will help you protect your company in bad times. Keep in mind that although a VC can’t tell you what to do, he or she can prevent you from doing certain things, so it is important to have a good understanding of all of the terms you consent to.

Understanding the VC model will help you to negotiate effectively with potential investors and strike a deal quickly. Give yourself the advantage by watching Shirley’s presentation here.


Produced by MaRS Media.

Next lecture: Raising Money from VCs on Wednesday, May 1, 2013


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