The following is the third blog post of a three-part series from Greg Phipps, our managing director of investment here at Innovacorp.
How Many Lawyers Does it Take to Screw in a Lightbulb? (*No offense intended to lawyers)
The transaction closing process is often the most unpredictable part of the investment process – a source of pain and cost to the entrepreneur. We don’t want to criticize our legal partners (entrepreneurs and investors typically each have their own legal counsel), but lawyers are trained to argue on behalf of their client(s). We do everything we can to manage the timeline and cost associated with satisfying the legal requirements to close a transaction and ensure our funds are disbursed, fulfilling the needs of the portfolio company.
Typical documents revised or created in this process are a Shareholder’s Agreement, Share Purchase Agreement, Shareholder Rights or Management Agreement, Employee Stock Option Plan (ESOP), etc. We’ve seen closings take two weeks, and we’ve seen them take up to six months. The latter is atypical, yet likely in instances where a company has many “loose ends” and other pre-existing shareholder issues that are completely unrelated to the investment transaction itself, but must be addressed to create a solid foundation for the company going forward.
On average, we’d suggest that four weeks is a realistic timeline to get through the legal requirements associated with a new equity investment.
Care & Feeding of VCs
Entrepreneurs who are not new to the process of raising venture capital have undoubtedly heard the advice: “Don’t go out looking for capital when you need it.” That’s easy to say when you already have capital and don’t need a first injection to launch a new venture. The advice revolves around the reality that the process (pitching VCs, securing their interest and commitment to invest, the diligence process and legal work that must be undertaken, etc.) of securing equity investment, from Innovacorp and most institutional fund managers, takes time. It consists of both subject and objective evaluation. It involves both internal and external party involvement. It involves approval by investment teams, partners, board directors or others. It involves legal processes and documentation. The timeline for many steps in the process is unpredictable.
In closing, the best advice we can offer is:
1. Be forthright and responsive to prospective investors;
2. Be prepared with a business plan and/or pitch deck; underlying legal documentation; a solid understanding of the market and customer segments; clear title to and documentation of technology/intellectual property;
3. Get to know the prospective investors/managers on a personal level, and ensure you are all on the same page and have a shared vision and shared goals for your company;
4. Be patient – the process takes as long as it takes and is frequently complex. And involves many other parties beyond the Innovacorp investment team.
Good luck and congratulations! It’s a bouncing baby…er…company. We look forward to getting to know you and working with you to help make your newborn venture a success.