Before due diligence: how to prepare for investment due diligence

Session 1: “Before DD”

We kick off our three-session webinar co-hosted with Metrix Partners. In this webinar we discussed “How to master the investment Due Diligence for your SaaS startup”, shedding light on this important topic by providing real life examples on how top SaaS startups have managed their investment due diligence processes. If you are fundraising or will be fundraising in the future, we would encourage you to share this webinar series with whomever you think it could be of help to.

For those of you strapped for time, we have prepared a summary with the most important points below. We hope you find it useful.

Section 1: Charting your investment landscape

Fundraising is a sales process: Fundraising is a numbers game, but spray-and-pray tactics do not work. Contacting investors without understanding who or what type they are is a mistake. Reach out to investors in a relevant way. Reputation is important, do not burn your image!

Organise yourself in such a way that investors can have a better understanding of the company you are building. Build a great data room, by which we mean, best in reach and quality, not in volume of documents!

Run a controlled process: Time management is key to get several interested parties at the same time. Always be responsive with information requests and run fundraising as a full-time job. As the CEO of the company, you MUST be on top.  

Maintain your investor CRM. Keep records of every interaction. You can’t remember everything, and fundraising is a “looong” process, requiring lots of conversations with many different people.

Fundraising is NOT a beauty contest! You only need one YES. But noes have value. Always request and record feedback after every rejection. It will help you iterate and improve your message.  

*Remember: the best way to get the best deal possible is to have 2-3 Term Sheets on the table. This can only be achieved through a strong process. For more on how to effectively manage a fundraising process, click here.

Section 2: Selecting key metrics that impact the valuation and reporting them well

B2B SaaS company valuations are mainly driven by three metrics: Growth, Net Revenue Retention, Acquisition Efficiency (CAC, CLTV or CAC payback period)

Don’t get us wrong, you can still get away without great metrics as the three aforementioned ones are not all that matter. Hot industries and hyped markets can also impact positively (…or negatively!)

SaaS-ify your company. Automating processes will save you time and prevent inconsistencies. Don’t be cheap if you can afford it: some tools might be expensive, but they are worth every penny. They can save your DD. Processes like billing, accounting and gathering subscription metrics must be 100% accurate. Be professional with these processes from day 1! Do not compromise data quality, you need reliable information across the company to make appropriate decisions.

Section 3: From accounting to the best management accounts

Adapt your storytelling and be sensitive to context. The story you present must consider why you are fundraising and what for. A pre-revenue or a Seed round have nothing to do with a Series A and a Series B round from an investor analysis perspective. You must know exactly what the investor in your stage is looking for: team, product, processes, efficiency, go-to-market, etc.

Risk that  a VC can accept is related to team, product, market, competition, even industry regulation. But VCs do not want to take many risks related to financial, tax or legal matters. Those matters need to be 100% correct and trustworthy. If that is not the case, the DD will bring those risks to the surface and at best you will get lots of representations & warranties in your investment agreement, or, at worst, the investor will walk away.

Section 4: Business planning scenarios

Don’t start with the top line, but with a bottom-up approach. Run different scenarios and stress-test hypotheses. Be ready to have your business plan challenged. Indeed, challenge is what you should be looking for: having a value-adding investor means open discussion on strategic aspects of your company.

Use benchmarks and be familiar with the metrics investors expect. If there is a specific KPI that you have not nailed yet, prepare answers, and try to have a good explanation for how you are going to fix it or bring it closer to industry benchmarks.

You can check out chapter 2 (During DD) & chapter 3 (After DD) of the Due Diligence Series below.