By Vic Singh and Kristin McDonald

Given venture firms can be somewhat opaque in how they process deals, coupled with the fact that the Eniac deal process is fairly unique, we wrote this post to provide founders with an in depth look at our process at Eniac with the hope that it will help them better understand our process and engender a discussion about how seed firms can best optimize their own process.

At Eniac, we are continuously iterating and improving how we process deals with the goal of increasing collaboration, reducing information asymmetry and making more informed decisions while optimizing for efficiency and speed. It is often said that the best venture outcomes are the ones where there were deeply opposing viewpoints and major dissent. Informed dissent is desirable but dissent based on information asymmetry is something we have worked to reduce.

It’s worth noting that our process works for us because we have no attribution, and so we are all equally incentivized to put the work in on each company, regardless of who sourced the deal.

The Traditional VC Process

Here is the traditional model for venture capital deal processing:

In the traditional model, it is very likely that the partner who is championing the deal knows much more about the opportunity than the others at the firm. As a result, when the founder gets to the traditional partner meeting pitch they are often interrogated with questions from partners who are hearing the pitch for the first time. Meanwhile the other partners end up with highly dissenting and in many cases uninformed opinions, culminating in a decision to invest that may not be based on all the relevant information.

The Eniac process

At Eniac, we’ve worked to reduce this information asymmetry to enable the lead partner to get to conviction on a company’s merits while ensuring that all partners have the relevant information before a decision is made. We call this process the round robin, and it was inspired by discussions we had with our friends at Foundry Group. It enables the founding team to get to know each partner and allows the partners to ask their own line of questioning and offer their own perspective and value in a deeper format. Below is an overview of our deal process.

Meeting with founders

Around 50% of our first time meetings are opportunistic and based on introductions from others in the industry, while another 50% are thesis driven — i.e. a sector that we’re deeply passionate about and looking to make an investment in. We initially meet with founders for 30–45 minutes to get an overview of what they’re building and where they are in their fundraising process. Here we try to get a basic understanding of the technology, product, and business model as well as fundamental concerns like how big is the market and how defensible is their approach. We also look to check off more logistical boxes, like is there enough left in the round for us to hit our ownership requirements and is there enough time for us to do our due diligence before the round is likely to close. Most importantly, this is also our opportunity to get to know the founders and make general decisions around how scrappy and authentic they are, as well as to understand their unique market insight. If we come away positive on all these factors, the company gets added to our Monday deal list.

Partner discussion and stack rank

On Monday we meet as a team to walk through our deal list, with each partner presenting the companies they are most excited about that they met that week. We each highlight which companies we feel are ready to move on to next meetings and which we need to do more due diligence on before we use another partner’s time. At the end we have a list of companies on our “board” which are ready for another partner to meet. Given bandwidth constraints, we stack rank those companies to pick a few that we are going to move forward with, while others either get passed on or put in a bucket where we decide to do more work before we elevate them to round robin. Those companies that move past the stack rank then get assigned time with another partner.

Round robin and diligence

Our round robin process is built to be flexible. If the company is early enough in their fundraising process, we like to have them meet each partner individually. If the timeline is more compressed, the lead partner can make the decision to group two or more partners together. I.e. if it was necessary, a company could go from first meeting with one partner to a final meeting with all three remaining partners at once. This gives us flexibility on our timeline and allows us to be competitive — our process can last several weeks or be done in less than a week, depending on each company’s unique situation.

As the team meets with additional partners, the lead partner is managing a concurrent due diligence process to fill in our knowledge gaps so we can get to conviction on the investment. This includes a questionnaire which we typically send to the team after their second partner meeting, collecting feedback from industry experts in our network, and customer and personal reference calls. It is ultimately the lead partner’s responsibility to make sure we have the information we need to carry out an informed vote on the deal.

As we move through the process, all of the data and feedback we’ve collected on the company is aggregated in a dedicated slack channel, which each investor reviews before speaking with the company to get up to speed. As we near the end of our process and it’s clear a company is going to go to a vote, we memorialize our findings into a comprehensive deal memo, which carefully lays out our thought process on the investment and presents all of the research collected to date.

Voting

If the company makes it through all four partners, we initiate a category vote along these vectors — team, market, moat, product readiness, ability to get to product-market fit and deal. Votes are placed on a scale of 1–4 with decimals allowed. This conversation allows us to suss out information asymmetries. For example, one partner may be a 2 on the market while another is a 3.5. The disparity is likely based on a knowledge gap. We usually come out of our category vote with 2–3 burning questions that the lead partner is then responsible for tracking down.

Once those questions are tracked down and the lead partner gets to conviction, we again meet as a team to have an overall vote (also 1–4), where we decide whether or not we will do the deal. A score of 1 is a veto while a 4 is highest conviction. We usually discuss where each partner stands before voting, so as not to go into it blind. At Eniac, a company needs a final score of 12 with at least one 4 for us to make an offer. Generally, companies that we make an offer to will have one 4, two 3s and one 2 as the final scores.

Winning and closing

Once we’ve decided to make an offer to lead or co-lead a company’s seed round (note we generally only lead or co-lead), we negotiate terms and work hard to win the deal. During diligence, we would likely have added value in terms of customer and co-investor introductions but once we decide to invest we deploy our founder network to provide insight into how we work with companies to help the startup do their own references on us. Once we’ve earned the right to invest, we work closely with founders to construct the best syndicate for their company and work through the closing process (which is generally seamless as our terms are vanilla). Here is our deal funnel conversion.

One big advantage of our process is that it better aligns us with our founders for working together after the round closes. Most funds tend to be very siloed where founders only work with a single partner. Since our process allows each partner to get to know the founder, partners have the relationship and knowledge to be helpful as we partner over time.

A note on processing deals during this era.

We have closed on two opportunities post COVID-19 where we have not met the founders and while we are still working through the impact on our process, we have instituted the following:

1) Optimize for teams we have previously met and for repeat founders. There are many opportunities with strong teams that we engaged with but didn’t invest in mainly because they were too early. We are seeing many of those teams come back to Eniac with more progress as their partner of choice. Having met them previously allows us to measure their growth and meets our in-person bar. The same logic applies to repeat founders — if we haven’t met a founder before, knowing they’ve built a venture-backed business gives us a referenceable body of work to help give us more insight into their abilities as founders.

2) Social distance meetings in our target markets for deals that make it down the funnel and have a line of sight to us leading their seed round. We are conducting thorough diligence on teams and opportunities and when we feel we may be close to conviction, we have instituted optional social distance meetings in-person in NYC and SF if founders are comfortable.

3) Additional video meetings — we are having at least twice the number of zoom meetings for deals we are actively working on to make sure we spend enough time with founders. This does not fully substitute for in-person meetings but it does allow us to get to know the founders in advance of the optional in-person socially distanced meetings. While we know this may make the process itself more arduous, we believe it’s a net positive for our founders as well to get to spend more time with us in order to make a more informed decision.

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