Diligence 101 for Seed Stage Startups

Micah Rosenbloom, Partner

For some entrepreneurs, raising capital is effortless. When you see a company raise tens of millions of dollars, series after series, especially if they have few other milestones to promote, you know you’re in the presence of a world class presenter. Fundraising is a startup super power, just like consumer product instincts and B2B sales acumen. Some founders are just “natural athletes” who possess a knack for storytelling paired and charisma, typically topped off with some credibility in a prior venture.

I think of these founders a bit like Tom Brady or Serena Williams. Sure, you can practice your serve a thousand times, but no amount of hydration therapy or TB12 resistance bands will allow you to compete with them. They are greatness incarnate and studying them is almost a waste of time. For all of us mere mortals, we need to focus on a scrappier style of preparation.

That doesn’t mean it’s impossible to get better at pitching. There are many useful blog posts that help founders avoid rookie mistakes. But perhaps the most underappreciated skill is helping investors with diligence. Overdeliver. Make it easier on the investor. Like the attorney with a seemingly endless supply of evidence, your chances of success will only go up.

Tech has become so big it now encompasses everything from mattresses to machine learning and it’s hard to find investors who are equally conversant in all of these verticals. Good VCs have several credible companies introduced to them every week and some of those deals are bound to overlap with areas that the investors is knowledgeable about. Those tend to be the deals they run to ground. While many investors pride themselves on looking for outlier companies, I suspect many gravitate towards companies that they can easily diligence. So if you’re in an atypical market it helps to make the diligence a bit more turn key for the prospective investor.

Here are some suggestions on how to make it easier to get the VC to yes:

Bring the References to the Investor

It’s the oldest trick in the book, but arguably one of the best. Most founders are connected to other portfolio founders or shared contacts with the prospective investor. Ask them kindly to put in a good word for you. In a process that relies on limited data points, hearing positive feedback will only help. The more the VC values the signal, the better. Just like getting hired, a positive, unsolicited reference can go a long way.

Set Up a Data Room

Typically the tactic of bankers in M&A and IPOs, it’s not unusual to see a seed stage company create a Dropbox or Google file that houses all the relevant diligence items, E.g. your deck, financial model, cap table, market reports, interviews with market sources, reference lists, etc. VCs extrapolate and the data room is a sign that you’re running a tight, buttoned-up process. You can withhold access to the data room until you feel that the investor is sufficiently close to making an investment decision. Maybe share the financial model later in the process, for example. But it’s always best to be on the ready, especially as different investors move at different speeds during the diligence process. Having a data room that you can populate with documents allows you to pace your potential investors.

Schedule Debate Practice

If you ever did debate or Model UN in high school or college, dust off the skills. Preparing for any question — the technical, the mundane, the crazy — is essential. Spend time taking turns with your co-founders answering the questions. Memorize the talking points and whom will answer which question. Nonetheless, both founders should be prepared to answers each other’s questions in case only one of you is present for a pitch. The best part — decide whom will play the role of the VC — get one of your friends to pick your favorite!

Host a Due Diligence Dance Party

Instead of making diligence a dreary chore, make it a party. Invite all of the investors you’re chatting with to meet your key clients in a convivial atmosphere. It creates some dynamic tension between potential investors, saves your clients from a half-dozen reference calls, and is another chance to make a great impression with your customer. My former colleague Gaurav Jain wrote a longer article about how to pull this off.

Share Your “Secrets” on Facebook Live

An entrepreneur recently pitched me a brilliant startup in a bizarre product category. We love the “weird and wonderful” at Founder Collective, but this idea was so far out of our comfort zone I didn’t even really know where to start. I would bet this is true of 99% of the VCs this founder pitched. Most people would pitch, get a round of polite “no’s,” and either seek strategic financing from people in that industry, or grow a small-business.

This founder was different. He went to his customers and broadcast Q&A sessions with them on Facebook Live. Now, instead of me having to figure out the “unknown unknowns,” I heard first hand from a customer about what they found useful about the product and where it needed improvement. Beyond their analysis of the product offering, I saw the enthusiasm that the users had for the startup. To be honest, this was a deal I was likely going to leave unpursued, but thanks to the creative thinking of the founder, I’m on the hook and diving into the problem space.

Remember, Your Social Feed is a Diligence Document

Don’t underestimate how easy it is for VCs to check you and your company’s social feeds. I regularly hear comments from other VCs like “their Instagram feed is amazing!” These things matter — so make sure your social media confirms what you’re saying in your pitch. If your co-founder has a knack for design, this is the forum to show it. Make sure your LinkedIn profiles are up to date, and that you don’t have bizarre rants all over the web. A little hygiene and focus can go a long way.

Last — Don’t be Afraid to Ask

VC diligence processes can vary greatly from investors who write the check after the first meeting to those that spend months or years getting to know a founder or entrepreneur. So, before you go too far, don’t be afraid to ask what their process is. And steal the VCs favorite line as your own and ask, “what can I do to help?” After all, no one has done better diligence on the opportunity than the founder her/himself. Why not share the notes?