work with regard to the background check for the entrepreneur is done. In an environment where there is no straightforward way to check the background and history of an entrepreneur such a referral mechanism helps the venture firm reduce its risk. On the topic of due diligence, Dr Chandrasekar added that “Due diligence requires a good understanding of the sector and its potential. This means that while venture firms should have financial knowledge and the ability to put term sheets together, they should also carry sectoral knowledge.”
With the right founding team and the right idea in place, the next step is putting together a workable deal. Successful venture capitalists need to be able to gauge an entrepreneur and use the right instruments in the term sheet so as to protect the venture firm’s investment while motivating the entrepreneur. For instance, one venture capitalist talked about his approach when investing in a family business, where the traditional mind set is that the business will continue to be run by the next generation and the generation after. In such a situation the venture capitalist used instruments in the term sheet that would encourage an exit.
To reach closure on a term sheet it is necessary for the venture capitalist and the entrepreneur to come to agreement on the valuation of the company. Inflated valuations are neither good for the venture firm nor for the entrepreneur. A naive entrepreneur may opt for a venture firm that gives them the

best term sheet as opposed to the one that provides non tangible value add. According to John Mullins, Associate Professor of management practice at London Business School, “Successful venture capitalists bring both operating expertise and robust networks to their portfolio companies and possess the kind of market savvy that enables them to find the right time and right manner in which to exit their deals.”
Anderson’s practical opinion on valuations and term sheets echoed Mullin’s thoughts. He said, “If the best regarded venture capital firm is within 10% of the best deal – the entrepreneurs should give the deal to the best regarded venture capital firm as they have experience and may have ways to help when the company hits a wall. The best term sheet may be from a newer venture capital firm who has less experience in the sector or may not be able to back up the entrepreneur when things get rough.”
Some venture capitalists’ approach to dealing with situations where the entrepreneur’s valuation of his / her company is higher than the venture capitalist’s valuation is to use convertible structured debt that is based on certain performance criteria. When the entrepreneur slips on previously agreed upon performance metrics, the debt gets converted to equity. This helps to protect venture firm’s investment, who leverage the fact that entrepreneurs are by nature optimistic, and hence will set targets that are on average hard to reach.