Tapping into venture capital has become an increasingly important piece of the start-up equation for beauty and wellness founders. The category is crowded; for a brand to be competitive, regardless of whether the focus is online or offline, scaling and fueling growth can be capital intensive. Growth requires inventory and inventory requires cash.

Harvard Business Review reported on a survey conducted by four academics—Paul Gompers at Harvard Business School, Will Gornall at the University of British Columbia Sauder School of Business, Steven N. Kaplan at Polsky Center for Entrepreneurship at the University of Chicago, and Ilya A. Strebulaev at the Stanford Graduate School of Business—that helps decode the opaque process of venture funding.

Deal Flow:

• More than 30% of deals come from leads from VCs’ former colleagues or work acquaintances.
• 20% of deals come from referrals by other investors, and 8% from referrals by existing portfolio companies.
• Only 10% come from cold email pitches from businesses.
• 30% are generated by VCs initiating contact with entrepreneurs.

The Odds:

• For each deal a VC firm eventually closes, the firm considers an average 101 opportunities.
• 28 of those opportunities will lead to a meeting with management; 10 will be reviewed at a partner meeting; 4.8 will proceed to due diligence; 1.7 will move on to the negotiation of a term sheet; and only one will actually be funded.

The Diligence:

• A typical deal takes 83 days to close, with firms spending an average of 118 hours on due diligence during that period, making calls to an average of 10 references.
• Few VCs use standard financial-analysis techniques to assess deals. The most commonly used metric by VCs is simply the cash returned from the deal as a multiple of the cash invested.
• The most important factors VCs consider when pursuing deals are: founders (95%), business model (74%), the market (68%), the industry (31%); the company’s valuation was cited fifth.

The Valuation:

• CFOs of large companies generally use discounted cash flow (DCF) analyses to evaluate investment opportunities. The next most commonly used metric is the annualized internal rate of return (IRR) a deal generates.
• Almost none of the VCs adjusted their target returns for systematic (or market) risk, a well-established practice of corporate decision makers.
• 9% of the respondents did not use any quantitative deal-evaluation metric.
• 20% of all VCs and 31% of early-stage VCs reported that they do not forecast company financials at all when they make an investment.

Deal Terms:

Inflexible: Pro-rata investment rights, liquidation preferences, and anti-dilution rights, as well the vesting of the founders’ equity, the company’s valuation, and board control. More flexible: Option pool, participation rights, investment amount, redemption rights, and dividends. Beyond the financial terms, VCs avoid focusing narrowly on financial terms during the process, giving attention to how the company fits into its portfolio and why their experience and expertise can help the founding management team.

Post-Investment:

• 60% “interact substantially” with portfolio companies at least once a week, with 28% interacting multiple times a week.
• Post-investment strategic guidance (given to 87% of their portfolio companies), connections to other investors (72%), connections to customers (69%), operational guidance (65%), help hiring board members (58%), and help hiring employees (46%).