Phases of an investment process

The process of investment in a venture capital transaction is a complex and lengthy process. Indeed, it is a process which does not end with the actual investment in a particular company, but which goes on until divestment, during the long period of monitoring and control of the company as part of the portfolio. Described below are the different phases and procedures which the fund management company will follow in order to fulfil the objective of obtaining value in the companies in which the investment is made and, in turn, ensuring a high return for its investors.
The different phases contained in an investment process are as follows:

• Identification of investment opportunities (Dealflow).
• Investment analysis.
• Investment decision.
• Investment monitoring.
• Divestment.

1. Identification of the investment project from among the portfolio of projects received by Riva y García Venture Capital/Private Equity.

The candidate companies for investment analysis should have an Executive Summary of the project. Executive Summary is understood to mean a document of no more than five pages which should capture the attention of the fund management team and contain the following information:

• Description of the business
• Market where it is present.
• Value of the product/service for the target market.
• Size of the market and expected growth.
• Competitive environment.
• Current phase of product development, specifying the characteristics and benefits of the product/service. Developments which are intended to be carried out.
• Necessary investment and purpose of the investment. Operation to be carried out.
• Summary of the main financial figures over five years (profit and loss account, cash flow and annual balance sheet).
• Description of the human team and their professional experience.
• Shareholder structure.

Once the Executive Summary has been received, it will be analysed by the fund management team and an internal new project committee will discuss the possible fit of the project in the investment portfolio of the fund. A response will be given to the entrepreneurs within a specified period, so that, if applicable, the process of in-depth analysis of the project may be begun. If, however, the project is rejected, reasons will be given explaining why the study is not being continued. The fund management team will always provide a response to the projects which reach them, even if they are not of interest to the fund.

2. Investment analysis:

Analysis and identification of the project value drivers. Special emphasis is placed on analysing the following aspects of the company/project:

1. Fund management team
2. Target market/sector
3. Business model
4. Positioning in comparison with competitors
5. Growth and profit potential

The investment analysis will include the phases shown below:

Phase 1: Preliminary meetings to get to know the management, business, company, growth prospects and management systems of the company: At these meetings, of which there may be several, a written description explaining the process and the basic venture capital conditions is handed over with the aim of the parties reaching an agreement on the points which must be shared from the beginning, in order to anticipate any possible areas of conflict or disagreement which could endanger the transaction at an advanced stage.

Phase 2: Joint study of the operation: Once the content of the aforementioned document has been accepted, an in-depth study of the business model and financial model of the company will be undertaken. For this purpose, the company will make all the necessary information available through:

• A provisional five-year business plan which will be used as a starting point for the analysis of the financial viability of the project.
• All the necessary information to study the operation.

During the whole of this preliminary due diligence process, meetings are held with the management team, analysing, and if necessary, collaborating in the development of a strategic plan for the company.

Phase 3: Negotiation of entry into the company's capital.

3. Investment decision

Once the financial study of the project has been carried out, and a positive result has been obtained, an investment agreement will be drawn up. In this agreement, the conditions for entry, duration and exit from the fund will be determined.

With regard to the conditions for entry, the most important points to be determined are as follows:

• Valuation of the company: agreed by both parties through a business plan. The fund management team will carry out a valuation following the usual methodology for the venture capital sector, such as the Discounted Cash Flow (DCF) valuation and the valuation through comparables (relating to companies from the same sector which are quoted on organised or multiple markets relating to sales of companies from that sector).

• Contributions to be made.
• % of equity to be acquired.

This agreement, which involves all parties, shall be binding, will be on an exclusive basis for both parties for a specified period of time and will be subject to:

• The approval of the terms and conditions of this investment by the fund's Investment Committee (independent representatives of the shareholders) and the drawing up and signature of a Shareholders' Agreement.
• The satisfactory result of a due diligence process (an audit of, among other things, the accounting, legal and technological processes of the Company).

4. Monitoring of the operation.

Riva y García Venture Capital/Private Equity intends to help the investee companies with value creation through:

• Strategic advice through its presence on the management bodies of the company (Board of Directors and Management Committee).
• Support through the network of national and international contacts which will enable the company to obtain new sources of business.
• Financial support and support in growth management.
• Improvement in Exposure commercial
• Defence of the interests of shareholders in additional rounds of financing of the company. Preferential access to the investment community in the company.
• Constant coaching.
• Support in strategic decisions such as: key recruiting, business model, commercial negotiations, etc.

5. Exit or divestment process.

All the venture capital/private equity funds have a set time horizon as at some point they will be obliged to repay the money to their investors. The exit by the venture capital company from the capital of the investee company will be agreed from the day of entry into the capital. Riva y García Venture Capital/Private Equity, like all Venture Capital Companies, has a temporary outlook which prevents it from remaining indefinitely as a shareholder. Some of the exit formulas which can be used are as follows:

1. Repurchase by the company owner
2. Sale to existing partners
3. Sale to third parties
4. Flotation