Welcome back to FindVC! If you’re reading this, chances are you’re looking to raise your Series A round from investors. Congratulations, this is a momentous occasion!
Did you know that the due diligence process for a UK startup raising a Series A can take an average of 103 days (Beauhurst, 2019)?
That’s why it’s crucial to be prepared and to know how to navigate the venture capital due diligence process. In this post, I will share my top tips for getting through due diligence and closing a successful Series A round.
We’ll cover everything from organizing your financial and legal documents to managing investor expectations, negotiating a killer deal, and even keeping your investors happy after they’ve written the check. Trust us, with these tips, you’ll be well on your way to closing a successful round and taking your startup to the next level. So let’s dive in, shall we?
II. Overview of the Due Diligence Process
Okay, so due diligence is the part of the fundraising process where investors conduct a deep dive into your company to assess its financial health, growth potential, and overall viability as an investment.
It is critical, as investors will walk away if they uncover risks which they weren’t aware of when they offered you a term sheet. Investor demand time to ensure that:
- You have been honest throughout the process
- To become comfortable actually committing to the investment
III. Best Practices for Closing Your Series A Round – by venture capitalists
Here are some key tips from world class venture capital investors:
- Keep the momentum going
Once you have investors on board, it’s important to keep the momentum going and maintain a sense of urgency throughout the fundraising process. This means being responsive to investor requests, providing any additional information they need, and keeping them informed of any material developments.
According to venture capitalist Tomasz Tunguz of Redpoint Ventures, “The most important thing is to keep the deal moving forward. Momentum is key.” In a successful Series A funding round for the HR software company, Gusto, the founders were able to close their round in just three weeks by being responsive to investor requests and maintaining a sense of urgency.
On the other hand, investor Mark Suster of Upfront Ventures warns, “If a company is slow to respond or moves too slowly on due diligence items, we can’t risk investing.” In a failed Series A funding round for the online learning platform, Udemy, the company lost momentum and ultimately had to lower their valuation due to lack of investor interest.
2. Be flexible
While it’s important to negotiate terms that are favourable for your company, it’s also important to be flexible and willing to compromise. This can help build trust with your investors and increase the likelihood of a successful close.
According to venture capitalist Semil Shah of Lightspeed Venture Partners, “Negotiating with your Series A investor is like playing poker. You don’t want to reveal your hand too soon.” In a successful Series A funding round for the mobile app development platform, Kinvey, the founders were able to close their round by being flexible on valuation and investment terms.
On the other hand, investor Fred Wilson of Union Square Ventures warns, “A founder’s inflexibility on terms can sometimes be a deal-breaker.” In a failed Series A funding round for the social media platform, Ello, the company was unable to close due to their inflexibility on valuation and investment terms.
3. Stay organized
As the fundraising process comes to a close, it’s essential to stay organized and keep track of all the moving parts. This includes keeping track of investor conversations, understanding their investment criteria, and having a clear picture of the funding terms and conditions.
According to investor Brad Feld of Foundry Group, “Having a system to manage communication and diligence is essential.” In a successful Series A funding round for the customer service platform, Help Scout, the founders were able to close their round quickly by using a project management tool to keep track of investor conversations and notes.
On the other hand, investor Fred Destin of Accel Partners warns, “Lack of organization can lead to lack of trust.” In a failed Series A funding round for the mobile app builder, Snappii, the company was disorganized and unable to provide investors with the information they needed.
4. Communicate clearly
Effective communication is essential to closing a successful funding round. Be sure to keep investors informed of any changes or updates, provide regular updates on the status of the round, and be responsive to their questions and concerns.
According to venture capitalist Jason Lemkin of SaaStr:
“Investors want to feel like they are part of the team and that they can trust the team.” In a successful Series A funding round for the cloud storage company, Box, the founders were transparent about any changes or updates to the investment terms, and provided regular updates on the status of the round.
IV. Sample due diligence questions a venture capitalist could ask you
Here are 25 sample questions that a venture capitalist could ask you during the due diligence phase split across five key areas:
- Structure and general organization:
- What is the ownership structure of the company?
- Where is the company registered and what are its tax registration numbers?
- Do any owners or employees have secondary or conflicting interests?
- How protectable are your patents?
2. Strategic assessment:
- How large is the total addressable market?
Sample answer: Our target market is estimated to be worth $X billion annually, and we estimate our share of the market to be Y%. We arrived at this estimate by analyzing market research and trends, as well as data from our existing customers and potential customers.
- What are the company’s growth opportunities?
Sample answer: We see several growth opportunities for our company, including expanding into new geographic markets, introducing new product features, and increasing our marketing efforts to reach a wider audience. We have a detailed growth plan in place that outlines specific goals and strategies for each opportunity.
- How does the company differentiate itself from its main competitors?
Sample answer: We differentiate ourselves from our main competitors by offering a unique value proposition that combines features that no other company offers. Our focus on customer service and user experience also sets us apart. In addition, we have proprietary technology and a strong IP portfolio that gives us a competitive advantage.
- What are the company’s strategic challenges in the coming years?
Sample answer: Our main strategic challenge in the coming years will be scaling our operations while maintaining our high level of customer service and product quality. We will also need to stay ahead of technological advancements and industry trends to remain competitive. In addition, we will need to continue to attract and retain top talent as we grow.
- What is the company’s value proposition or innovation?
Sample answer: Our value proposition is to provide our customers with a comprehensive and user-friendly solution that solves a critical problem in the market. Our innovation lies in our unique approach to combining several features into a single platform, as well as our use of cutting-edge technology to enhance our product offering. We have also developed proprietary algorithms and tools that set us apart from our competitors.
3. Assets and financials:
- What are the company’s revenue streams?
- What is the company’s monthly recurring revenue?
Sample answer: Answer: Our monthly recurring revenue is currently $X, and we have a high retention rate among our customer base. Our revenue has been steadily growing at an average rate of Y% per month over the past year.
- What physical assets does the company own?
Sample answer: Our physical assets include office equipment, computer hardware, and software licenses. We also own a small amount of inventory related to our product offering. These assets can be leveraged to support our operations and to generate revenue through partnerships and licensing agreements.
- What currency financial liabilities does the company have?
Sample answer: Our financial liabilities are primarily in the form of accounts payable and bank loans. We have a strong financial position with a debt-to-equity ratio of Z, and we have a detailed financial plan in place to manage our obligations and maintain a healthy cash flow.
4. Legal and risks
- Is the company involved in any ongoing or proposed litigation?
- What licensing and permits does the company hold?
- What government regulations apply to the company?
- What significant contracts and obligations exist for customers, partners, vendors, and other service providers?
5) Operational assessment
- How would you describe your company culture, and what steps are you taking to maintain it as you grow?
- Can you walk me through your hiring process?
- What is your product roadmap and how do you determine which features to build next?
- What are you main performance metrics used to track the success of your business?
The key takeaways from this blog are:
- Due diligence is an important part of the fundraising process where investors conduct a deep dive into your company to assess its financial health, growth potential, and overall viability as an investment.
- Keeping the momentum going, being flexible, staying organized, and communicating clearly are some of the best practices that can help close a successful Series A round.
- To navigate the due diligence process successfully, founders need to be honest, organized, and patient. They also need to keep growing their business to attract investors and fill any gaps left by investors who may pull out.
- Honesty, organization, patience, and growth are the key factors that can help founders successfully navigate the due diligence process and close a successful Series A round.
The blog provides some real-world stories and examples of founders who did it well and badly, as well as real quotes from investors and venture capitalists to reinforce the points made. It emphasizes the importance of being well-prepared, organized, and honest to increase the likelihood of closing a successful round and taking your startup to the next level.