Raising Your Institutional Round: Chapter 13
This is the 13th chapter of my upcoming book, “Move the Needle Anyway(s): Raising Your Institutional Round.” There are a total of 16 chapters. The book is currently with the publishers, however, I wanted to start sharing the content in a form of a series of blog posts so the startup ecosystem can benefit immediately. I hope you enjoy :)
Chapter 13: Due Diligence & The Data Room
At this stage, if multiple investors are asking for access to your data room, you and the team might be scrambling to compile the data room. Do not worry—you do have time. You can hold them off by letting them know that you are in the final stages of releasing the data room, you have multiple parties waiting, and that you prefer to release the data room to them all at once. This allows you to do a few things:
Stimulate FOMO: All investors know that other investors are moving deeper in the process. It is also a way for you to move other investors who might have finished first meetings but have yet to get second meetings on the calendar—you can let them know you have parties wanting access to the data room and that you are more than happy to help them through their process and catch them up. You want to give investors the hope that they can win, not just scare them.
Control the Funnel: You don’t want one investor to get too far ahead of the pack. You want multiple parties in the data room at once so you can streamline your process by answering any questions that arise, producing a FAQ document, and your CFO/VP of Finance can schedule data room walk-throughs. You also don't want to scare anyone by being too forceful. If they ask what your investment timeline is, make sure you are setting an appropriate time frame that isn't too aggressive. If you push someone out of the process,you can't use that party to move other parties in the pipeline.
If an investor is willing to commit their team’s time to performing deeper diligence, then you are moving closer to the potential of a partnership meeting. Start scheduling a meeting off the back of releasing your data room so that you can answer any questions they have and/or walk them through key items. Typically, this can be led or co-led with your CFO/VP of Finance. The purpose is to ensure that their understanding of your business is congruent with your understanding—everyone performs analysis differently and therefore they can paint different pictures about your company even if they are presented with the same data. You want to ensure that they aren’t making a decision based on the wrong assumption.
Now, some funds have their own restrictive diligence processes. For example, they might use their own data analytics engine; they plug key figures in their templated form, and their engine delivers a comprehensive 8-page report, for example.
I suggest providing a README section specially for spreadsheet models since everyone performs modeling differently. I also recommend providing a FAQ document—this can be a live document that is updated as you go to address common questions investors have been asking you. Investors will also perform their own diligence on customers by contacting them directly—you won’t be part of this process. However, there are times where they might ask to speak directly to one of your existing customers to expedite their process.
As they review your data room, a few things can happen:
They can bow out of the process because of something they didn’t like. This could include feedback they received from performing their independent customer calls.
They will come back with additional requests for clarifying information or questions they want answered.
In the fortunate case you have an existing investor who would like to lead your round but has been supportive in your going to market to find another VC partner, you can let them know you have multiple parties moving towards the data room. This can encourage them to consider giving you non-predatory terms since they know other parties will be bidding to lead your round. However, I suggest they hold off on offering those term sheets until multiple parties are nearing completion of their data room analysis and you are already in talks with them about scheduling the partnership meeting. While announcing you have a term sheet is a powerful way to catalyze the process, it is a double edged sword. Some people might bow out of the process because they simply don’t believe they can work to your timeline and win a bid to invest.
Your goal at this stage: give investors enough of a reason to move you to a partnership meeting.