Innovacorp Early Stage Venture Capital: Investment Process

Some of the start-ups that approach our investment team about venture capital are led by seasoned entrepreneurs. Others are led by fresh-faced student innovators pursuing entrepreneurship for the first time. And all the others come from every other background you can imagine.

Many of these founders tell us they don’t really know what to expect during the fundraising process. Venture capital is “a bit of a black box,” we’re told.

So we’re taking the mystery out of “the process” of early stage venture capital investment. We’ve turned that black box into the series of purple boxes below to outline what to expect when you’re expecting* investment from Innovacorp.

Introduction

Our investment team gets to know the founders and the investment opportunity.

Due Diligence

If a preliminary screening is satisfactory, due diligence is done on the start-up’s technology, business, markets and team. An investment team member is identified to lead the investment diligence and recommendation process.

Entrepreneur(s) Pitch

Upon satisfactory diligence, the entrepreneurs are invited to pitch to our investment team for the opportunity to have the deal recommended for further approval.

Additional Diligence

Once the investment opportunity has been vetted by our investment team, additional diligence may be required and conducted in advance of a formal presentation to Innovacorp’s investment committee.

Investment Team Approval

The investment will be recommended internally if diligence is satisfactory and our investment team is in favour of closing the deal.

Term Sheet Issued

A term sheet will usually be proposed between Innovacorp and the start-up following approval by our investment team. This non-binding document outlines the pricing, structure and terms of the investment in order to reduce the time and capital required to produce closing documents. Sometimes co-investment is a requirement, and the time to meet this condition will affect the time to close the investment.

Preparation of Internal Investment Thesis

Once approval has been granted by our investment team, a formal document of recommendation, the “investment memorandum,” is prepared as a comprehensive review of the investment opportunity. This internal document is provided to Innovacorp's investment committee in advance of the final investment pitch.

Investment Committee Pitch

The investment manager leading the deal is responsible for defending the investment recommendation in front of Innovacorp’s investment committee. Aggregate investments over $500,000 require approval by Innovacorp's board of directors whereas amounts of $100,000 or less require approval by Innovacorp’s senior management team.

Board Approval

Innovacorp’s board of directors will meet to grant final approval on the deal, reject the investment recommendation or conditionally approve it – which can require additional due diligence and time. Board approval is only required for deals where the cumulative amount Innovacorp invested in the company to date exceeds $500,000. The board has delegated authority to the investment committee for approvals less than this amount.

Closing

If final approval has been received, both parties engage legal counsel and work towards signing legally-binding closing documents.

Deal Closed

The invested funds are transferred upon deal closing.

There you have it – “the process.” Of course, we often get asked “how long does the process take?”

That’s tricky to answer. The average is about two and a half months.

However, the timeline from initial pitch to close (money in the bank) is impacted by a variety of factors – not all of which are in Innovacorp’s control! Sometimes it takes several weeks for us to get to know the founders and understand the technology, the market, the business strategy and revenue model; sometimes our due diligence uncovers some work the start-up needs to do before we can proceed; sometimes having several investors at the table (a great thing!) can slow things down.

The best advice for speeding up the process is for the start-up to arrive prepared (i.e., know your market, your opportunity) and then responsive when the investors ask for information.

One last note: While our mission at Innovacorp is to find, fund and foster innovative Nova Scotia start-ups that strive to change the world, naturally a decision to “not invest” can be made at any time within the investment process.

* For an in-depth look at “what to expect when expecting investment from Innovacorp,” read the three-part blog post by our managing director of investment, Gregory Phipps. Click here for Part 1