The Due Diligence Survival Kit
Venture capitalist Sivan Shamri Dahan shares her tips on making the most of your late-stage startup’s due diligence process
Due diligence is one of the least favorite tasks on a startup’s CEO’s list. While it is a necessary milestone in a company’s life, raising money forces CEOs to make time for this demanding process while continuing to successfully run their startup. However, due diligence can also be seen as an opportunity to gain independent and professional insight on how to improve your business operations and set the infrastructure for achieving the next level of scale.
As a growth-stage company, raising funds is a milestone marking a significant event in your company’s life. Investors know you have built a great company and that your product was well received. They also know you have put together a strong team and built a unique culture. Now, you need to convince them that you are mature enough in your processes and standards and can raise and absorb a sizeable amount of growth capital that will enable you to significantly scale up.
The due diligence process is going to be far more data-intensive than when you were raising your earlier stage rounds. As a late-stage company, your business has a substantial customer base, possibly spread across different sides of the globe, and is generating revenue and spending more. You have far more data and history to process, analyze, and report so the financial and competitive discussions are significantly deeper. Setting up an organized and detailed virtual data room is going to make the process significantly more efficient
Understand the CEO’s role in the process
The Due Diligence process typically starts with a CEO presentation which should cover: the company’s vision, tightly and coherently articulating where the company aspires to be; the current state of the relevant market and how it can be disrupted; and the available revenue opportunities. As a CEO, think about the fact that running a competent fundraising process also serves as a testament to your leadership skills and your potential ability to run a future successful initial public offering roadshow.
A late-stage investment differs from an early stage one partly because it focuses more on the team. The investors are not betting on the idea or the product—both have been proven already—but is focused on the executive team’s execution abilities. When describing the team, focus on experience, accomplishments and complementary strengths.
Describe your business model and how you will create value. Make sure to provide a candid competitive analysis. Investors expect the pitch to include references to historical financial data as well as projections going forward. Share the metrics, key performance indicators you use, KPIs and cohorts. Tell the audience about the company’s investment history and what you plan to use the proceeds for. Try to preempt any possible concern that will arise to ensure a professional presentation.
The CEO is expected to craft a compelling vision and to reassure investors of his ability to execute the said vision. If you demonstrate a deep, emotional commitment to lead and grow a large company and an understanding of the growth levers and building blocks required to get there, you will make a great impression.
Drilling into the data
As mentioned above, an organized and detailed data room is key as a deal materializes and investors will want to review the financials of the company. When your company has reached its growth stage, you already have some history to share, funds raised, a cap table and legal documents from your the last round.
Make sure to follow the tips below when setting up your data room and you will be doing both parties an excellent service. Include a historical profit and loss report and outline the company’s cash flow. Indicate the current employee headcount and list all departments. Make sure that the financial forecast is for three years and indicate the pipeline of new customers used for calculation. If you have partnership agreements in place, include these as well. Share a professional third party market size report and be frank about the competition you see in the market. This may seem like a long list but complying with it indicates that you are organized and mature in your processes.
Get management on board
Since investors are going to be meeting with the managing team, its involvement and engagement in the process are extremely helpful. Ensuring everyone is aligned with the targets and challenges ahead is always beneficial even in day to day business, but is crucial for investors trying to assess whether the team is fit for the next level of growth.
Investors want transparency in order to get the full picture. They want to hear about the good, but also about the bad, and the ugly in order to know where to focus their efforts as partners on the morning after the investment. Being forthcoming is essential to the due diligence process, so put together a list of partners, clients, and personal references and be prepared to explain financial periods that seem out of character, why they happened, what you have learned from the situation, and how you plan to avoid similar issues in the future.
Do your own due diligence
Before you sign the dotted line, you should do your own due diligence process on the investors and gain reassurance that you are dealing with trustworthy partners. Check out their history and ability to offer support for growing companies and to work alongside founders and co-investors.
Sivan Shamri Dahan is a co-founder and general partner at Tel Aviv-based late-stage venture capital firm Qumra Capital.