Verve Ventures evaluates over 4,000 startups annually, with only 100 reaching the assessment stage. Given the intricacies and technical complexities of the deep tech landscape, the evaluation of these potential investment opportunities is challenging: the investment team needs to delve into the core elements that shape a startup’s viability, from market dynamics and technology to the cohesion of its founding team. In this article, we take a closer look at the steps Verve Ventures follows to reach an investment decision and the meticulous research behind it.

Verve Ventures’ selection process averages around six months from first contact to investment.

Sometimes this extends to as much as two years. This long time frame allows the investment team to carry out a detailed investigation into various aspects of a potential investment, ensuring a comprehensive understanding and effective risk mitigation.

First contact

Inbound leads make up around half of Verve Ventures’ deal flow. The process begins with entrepreneurs approaching the firm with their proposals, either directly or through other venture capital firms, some of whom have previously co-invested with Verve Ventures. These proposals can also come from individuals within Verve’s extensive network. This initial influx of opportunities forms the foundation of Verve Ventures’ investment pipeline.

Outbound efforts involve our investment team actively seeking out startups that align with Verve’s investment thesis. We invest in European, early-stage deep tech startups, mainly within climate tech, industrial tech, health and bio and the future of computing.

This is achieved through a combination of methods, including cold outreach via emails or leveraging connections to initiate conversations. The goal is to build long-term relationships with the founders of startups, fostering open lines of communication and trust.

This phase of relationship building is essential, as it sets the stage for ongoing interactions. The investment team stays engaged with startups, following up periodically and adapting strategies based on the startups’ evolving circumstances.

Initial Calls and Positioning

Once a potential investment opportunity is identified, Verve Ventures starts a more in-depth assessment process. The first step is an initial call during which the investment team aims to gather as much information as possible about the startup. This initial conversation serves as an opportunity to understand the company’s business model, technology, and market positioning.

It’s not only Verve assessing the startup but also the startup trying to understand if Verve is a suitable partner. The conversation is about the initial investment and potential follow on investments. Startups want to understand what additional value beyond capital Verve can provide thanks to its network such as introductions to potential clients or support in recruiting talent.

Internal Assessment

Following the initial call, subsequent conversations go deeper into specific aspects of the company. These discussions may be structured around technology, product details, sales strategies, and other critical elements. Each successive call allows the investment team to gradually uncover more layers of the startup’s operations and understand various facets of its business.

Internally, the investment team conducts a comprehensive assessment based on the information gathered. This assessment consists of several steps and will be internally challenged by other senior team members not involved in the transaction. At the end of every step, we ask ourselves: should we proceed with further evaluation or not?

Our investment team’s extensive experience allows them to quickly spot red and green flags when evaluating the viability of startups. Here are some of the most common:

Red Flags:

  • Under-incentivized founders: Lack of proper incentives for founders can signal a potential lack of commitment or motivation. This can for example be the case if a startup’s founders have already given away an excessive share of the company to investors in earlier financing rounds.
  • Excessive cash burn: A startup burning through funds rapidly without corresponding growth raises concerns about financial sustainability and may struggle to find investors willing to finance the company in the future.
  • Slow growth: Failure to exhibit substantial growth over time may indicate a lack of product-market fit, a challenging market environment or bad execution.
  • Small market size: An addressable market smaller than $1bn restricts the startup’s growth and Verve’s return potential.
  • Lack of defensible products: Products without a clear competitive edge, IP, strong technology, network or execution may struggle to withstand market competition.
  • Founders not working full-time: Full-time commitment from founders is essential for steering the company through challenges and uncertainties.
  • Insufficient funding: Inadequate funds raised, resulting in less than 24 months of runway, can pose significant risks.

Green Flags

  • Visionary and driven founders: Founders with a clear vision, drive, and openness to feedback are positive indicators of potential success.
  • Large and growing market: A sizable and expanding market creates opportunities for the startup to scale and thrive.
  • Strong financial traction: Demonstrated financial success, including revenue growth and profitability, showcases the startup’s viability.
  • Ability to attract top talent: A startup’s ability to attract skilled and experienced professionals highlights its appeal and potential for success.
  • Scalable product: A product with the potential to scale efficiently and meet market demand is a positive indicator.

Reference checks and external validation

Before moving forward, Verve Ventures conducts reference checks to gain external perspectives on the startup. These reference calls involve conversations with industry experts who can provide insights into the market, the technology landscape, and the startup’s potential challenges and opportunities. Verve Ventures rates the independence level of external experts to ensure a balanced and objective evaluation.

Competitor discussions also play an important role in shaping Verve Ventures’ understanding of the market. Engaging with competitors and industry peers provides valuable context, allowing the investment team to gauge how the startup compares to others in the same space.

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Investment Committee decision

If the assessment reaches a positive result, the investment team presents the opportunity internally to the Investment Committee. This committee is composed of key members, including Verve Ventures management and senior investment team members. The presentation serves as the first formal evaluation, determining whether the investment has a favorable risk-return profile and meets Verve’s quality standards.

The Investment Committee discussion includes a pitch call with the founders, an investment memo summarizing the key findings and investment thesis as well as a milestone-based analysis of the potential outcomes. This marks the first significant decision point in the assessment process: does Verve Ventures want to continue with this investment opportunity?

Legal and financial due diligence

Once an investment receives a positive decision from the Investment Committee, the investment team moves on to the next critical steps: legal and financial due diligence. Legal due diligence involves a meticulous examination of contracts to verify the accuracy of the information provided by the entrepreneurs. This includes simple tasks such as confirming the existence of the company and more challenging ones such as reviewing the investment contracts in great detail. As the companies are still at an early stage, the legal due diligence can still be mostly performed internally between the investment team and Verve Ventures’ legal counsel.

Financial due diligence focuses on verifying the financial claims made by the entrepreneurs. Verve Ventures scrutinizes financial records, customer contracts, assessing revenue figures, and comparing them against the information provided.

Negotiation of Terms

After all the previous steps have been successfully concluded, Verve Ventures and the entrepreneurs engage in negotiations to finalize the terms of the investment. This phase is often challenging, as it involves discussions on valuation, economic terms, and other contractual details.

Negotiations can be intense, as both parties seek terms that align with their interests. Valuation, in particular, is a critical aspect, with entrepreneurs aiming for a higher valuation while investors aim for a more conservative figure. Achieving a mutually agreeable term sheet is essential before proceeding to the final stages of the investment process.

Upon reaching an agreement on terms the details will be worked out by lawyers in an around 100-page investment agreement. The more detailed the term sheet is, the less negotiation happens in the contracting phase. The money is wired to the startup, and the capital increase is entered in the commercial register. This marks the official investment by Verve Ventures in the startup. The announcement of the financing round to the public via a press release on the startup’s behalf usually comes after the fact.

In conclusion

Verve Ventures’ process of sourcing and assessing startups balances thorough assessments with relationship-building efforts. It emphasizes the importance of understanding not only the financial and legal aspects of a potential investment but also the market dynamics, technology, and the team behind the startup. By navigating through these intricacies, Verve Ventures ensures that every investment aligns with its strategic goals and vision, and has the potential of attractive financial returns.