The following is the second blog post of a three-part series from Greg Phipps, our managing director of investment here at Innovacorp. Stay tuned... On Thursday, he’ll tell you what he thinks about lawyers.
How Long is a Piece of String?
Like many seed and early stage funds, Innovacorp looks to its investment and incubation teams to develop a pipeline of compelling entrepreneurial ventures and investment opportunities. Typically, an investment manager engages the ecosystem from many points to “shake the tree” to see what cool companies have been or are in the process of being launched, whether it’s from an incubator, basement, or corporate boardroom as part of a build and spin-out strategy.
From there, the process and timeline to conclusion of an investment commitment and legal transaction becomes somewhat unpredictable and the chronology of milestone events almost impossible to forecast. When entrepreneurs ask us, “How long does it take to secure investment from Innovacorp?” we often offer an admittedly vague response: “It depends.” The process of getting to know a company’s founders might take numerous meetings over several months before we understand the technology platform, the business case, the market opportunity, the business strategy and revenue model, and of course, the personalities and experience of the people leading the venture. We meet with VCs from around the world, and this aspect of the investment “process” is consistent everywhere.
Assuming the initial quantitative and qualitative evaluation, known as “due diligence,” passes muster, our process then requires the entrepreneurs to come in to formally “pitch” the investment opportunity to the investment team, a process founders should expect with any venture capital fund manager.
Once the entrepreneur’s venture gets the proverbial “green light” from our team, we typically transition to negotiating a term sheet: a non-legally binding agreement of the terms and conditions of our proposed investment in the company. That process alone might take anywhere from a day to a month depending on how quickly both parties come to a mutual agreement on pricing and other terms.
Any remaining due diligence, including external expert engagement, legal/IP reviews, may extend the timeline to closing the deal and disbursing funds by days or weeks, depending on the nature and extent of due diligence. We, like any professional fund manager with responsibility for another party’s money (the Nova Scotia government, in our case), have a fiduciary duty to investigate and confirm representations related to IP claims, technology transfer and ownership, revenue and customer history, financial statements (historic and pro-forma projections), and even criminal and credit background checks of the owners and managers of the companies in which we are investing. We recognize the necessity to expedite investment, and are painfully aware that often “speed to market” represents a key competitive differentiator for many companies. However, we can’t circumvent or always control the process and speed of an investment transaction. It’s the “known-unknowns” and “unknown-unknowns” that are often the cause of a delay in closing and disbursement of an investment.
Innovacorp investment team members who champion and “own” a new or follow-on investment transaction, also have the responsibility to author an in-depth thesis, presentation and review of all investments we propose: the Investment Memorandum (IM). The IM forms the basis of our presentation for approval of all investments to either the internal management team (commitments of $250,000 or less) or the external investment committee and board of directors (commitments greater than $250,000). Once approved by the management team or board, we’re usually ready to close.