All Funds Are Not Created Equal: What Venture Fundraising Looks Like

David Spreng Contributor

David Spreng is a seasoned venture capital and growth lender with 30 years of experience, the founder and CEO of Runway Growth Capital, and the author of All Money Is Not Created Equal .

The first step in the venture debt raising process is a quick, preliminary screening phone call between you and the potential lender who sells and listens to equal parts - of both sides.

Think of it as a first date. If this goes well, then it should be quickly followed up with the signing of an NDA by both parties. (VCs don't like signing NDAs, but subprime lenders don't mind.)

At this point, we begin our initial due diligence. We generally ask six things of a company:

A presentation to investors

If you are looking for investment funds, you have probably recently raised some equity. The set of investors you would have used for this also works for venture capital debt. (There are many examples online.)

The 409A

The annual assessment of the company's equity value, designed to protect employees who are granted stock options so that they cannot later be taxed for having obtained "cheap stocks". Usually, these valuations arrive at a level that makes obtaining equity attractive to employees. Don't worry if the value assigned by the 409A appraisal firm is lower than you think is fair. We know how these ratings work and don't fixate on their rating.

The 409A will include different ways to analyze business value, the same things we look at: discounted future cash flows; comparable to public companies; comparable to recent mergers and acquisitions. It will also give a very good history of all the funding the company has received, and it always includes a five-year projection.

A detailed capitalization table and funding history

This will include anyone who owns part of the business, a fundraising history, and a history of any bank financing or external debt used.

Historical financial data

Ideally, we will receive five years of historical financial statements. We would like them to be audited, but it is not necessary.

Financial forecast

In order for us to do our job, we want a fully linked tri-statement financial model. The three statements are: balance sheet, income statement and cash flow statement. If there are any delays or problems in the process, it's usually because of a delay in getting three-linked-statement projections, which allow us to do "what if" analyzes (such as "If things go worse than expected, when do things go How much does this startup need to reduce its variable expenses in order to remain viable and able to service our debt?").

Everything I've described should take about 4-5 weeks from our first phone call. That puts it at week 6 for a signed term sheet.

A lot of times we lend to companies that sell to big companies, so instead of having a million customers, they have a hundred, and we'll want to understand how they're selling, how big their sales forecasts are predictable and how comfortable with the years to come. All of this helps us judge how much we believe in their financial projections.

A list of the biggest clients, present and past

Detailed customer information allows us to identify customer concentration or attrition. These can be quick disqualifications, and we don't want to waste anyone's time if they do.

If a potential borrower's customer base is too concentrated (less than 15 total customers or more than 50% of revenue from just a few customers), it's too risky for us. Or if the startup has a lot of churn - meaning their existing customers have decided not to renew or stay with them - that's another red/likely disqualifying flag. There are also nuances around this. If your product has evolved significantly and in what we consider a positive and logical direction, churn might make sense.

With all this information, we can perform a desktop scan which usually takes two weeks. We could do it faster if absolutely necessary, but we like to give ourselves two weeks. If the office analysis is positive, we will issue a condition sheet.

Doing it our way allows us to customize a thoughtful structure and set of terms that are fair to us and appropriate for the borrower. For example, the adaptation of the loan to the borrower can be done when you really need the money. Maybe you need it right away, or maybe it's a little further down the road.

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