How to prepare for an investor due diligence🔬
If you are getting ready for a fundraising round, you need to do some homework and prepare to present your company to investors.
You probably have already heard that the most effective way to pass through the first barrier with investors is to get a warm introduction. I know this may be hard to understand (if VCs and Angel Investors make money by investing in companies, why the hell do they care about intros?). But remember that the Venture Capital world is all about the network. Once you pass the first 'threshold' of validation by being connected by a trustworthy source, you will be much better positioned to move conversations forward.
But before you start to look for intros, ensure that you are ready for the due diligence process, in which investors will investigate if they want to invest in your business, how much, and under which conditions. At the first due diligence stage, investors are looking for all the reasons to pass you on to the next phase - so the more well prepared you are to address investors' concerns and interests, the more likely you are going to receive a term sheet.
So that's why it's useful to have a data room prepared, with materials and data organized in a way that is digestible and easy to understand by the investors.
Having worked with fundraising for more than a decade and wearing different hats (I was an M&A banker prior to joining Series A/B startups in Asia) and different sizes, I can suggest a structure that works pretty well:
Business Overview
Business model and Strategy
Competitive Landscape
Team
Financials: Actuals and Forecasts
Overall understanding of business
Use of funds proceeds
Track record: KPIs, and others
Let's go briefly by each item so you can understand why each one of them is relevant for VCs and how you should be thinking of your company's data room:
Business Overvie
Business Model and Strategy: A written format of your business model can be particularly relevant if you have a complex product or service. Be simple but not simplistic in your presentation. The clarity in your words is a reflection of the clarity of your thinking which is a good leading indicator of a founder's ability to execute.
Competitive Landscape: here you show how big is the opportunity and how you differentiate your business from your current and potential competitors. Investors want to be educated by you and they will also do their own research so it will be good to validate if they get to the same conclusion as yours.
Team: 'Ideas are cheap, execution is key’. Do we need to say anything else? Have a presentation with a quick bio of your team and supporting evidence that you have the right experience in place to execute.
Financials: Actuals and Forecasts
Financial Statements and Forecasts: The historical financials show how has growth evolved so far. By presenting your figures you also have the chance to educate investors on how they should look at your business prospects - even if there are a few information that is basic (Revenue, Gross Margins, Expenses, and the unit economics: CAC, LTV - which I wrote about a few weeks ago if you'd like to recap the concepts).
The forecasts in the data room are the opportunity you have to prove that you have a clear vision of your business, a deep understanding of the financial metrics and there's a clear framework behind the funds you are asking for. With the projections you also allow them to understand what would be the returns they should target based on your assumptions.
Track Record: Accomplishments
Other than financial data, there are other track-record proofs that you could present: such as operational metrics, NPS and other cosumer-satisfaction metrics you use in your business.
It’s also important to show the network you were able to build. List the advisors, partnerships, relevant clients, press releases, media mentions - any specific business attribute that you have already accomplished that could serve as a validation of your ability to execute.
Investors want to see that the founders are able to deliver on their promises, and there's nothing wrong about doing some self PR. After all, if you have a great business but nobody knows about it you're not really going far - or at least not far enough for the returns investors would like to see.
🎧 Podcast recommendations
▶️ Brains: Talking Money: Sam Parr and Anthony Pompliano go on this honest and candid discussion about money within the context of successful couples. Should you sign a prenup? Should you give all your money to your spouse to manage it? Have a listen. FYI - Sam runs The Hustle, one of the biggest newsletters in the world. He sold it to Hubspot for over $20M. Anthony Pompliano is one of the best-known and most successful investors in crypto and tech.
▶️ The Economist Asks: Nobel Prize winners 2021: I’m lucky enough to live in the same country as Maria Ressa, the Filipina journalist that was recently awarded the Nobel Prize this year. She discusses the challenges for freedom of speech not only in the Philippines but in several countries around the world. She also holds Facebook accountable for the political polarization we are witnessing in our modern society by creating a platform that allows hate speech to become viral.
This is Open Books - a weekly newsletter carefully curated by me, Leticia Souza. Every week I’ll be compiling relevant topics around finance and financial strategy - from choosing your first accounting system to how to successfully close a fundraising round to your business.
In a world full of noise, I aim to bring clarity and direction to your finance processes so you can manage your business in peace. If you find the content useful, do your friends a favor, and please share this newsletter with them.
See you all next week 👋🏼
Leticia
Great newsletter this week. Yay for Maria Ressa!