Module 3: How to Begin Diligencing a Company

This module will help you to review a pitch deck, understand the diligence process, and prepare questions for founders.

By Megan Ananian

Step One: Review the Pitch Deck

When evaluating an investment opportunity, requesting a pitch deck from the founder is a great first step. Full-time investors review dozens of decks each week, with the average time spent on a deck just two minutes and 47 seconds, according to Docsend. That’s a short amount of time for a founder to convince you that a company is worth a phone call, so understanding what you’re looking for—and whether or not a founder can communicate it quickly and succinctlyis key.  Here is what you should expect to see in a pitch deck and how to review it.

Contents of an early-stage pitch deck

  • Problem: What is the problem being addressed?
  • Solution: What is this company’s solution to the problem?
  • Market: How big is the opportunity / market for that product or service?
  • Traction: Do they have any notable traction (relevant metrics, milestones, strategic partnerships) to date?
  • Growth: What does future growth / roadmap look like?
  • Team: Who is the founding team?
  • Terms: What are the details of the fundraise?

How We Review a Deck

Upon receiving a deck for the first time, we skim it quickly to acquaint ourselves with what the company does (i.e. “Soho House for dogs”, or “Hardware for menopause”) as well as the stage and valuation. (For a refresher on typical valuations at the early stages, check out Module One). If the concept and opportunity align with our thesis, we’ll go through the deck again, more thoroughly this time, to drill down on the details. After a second review, you should have clear answers to the following questions:

  • Do I understand the problem being solved?
  • How big is the addressable market (TAM/ SAM/ SOM)? Note: Typically, investors want to see a $1B+ market opportunity in order to provide VC-expected returns.
  • How unique is the solution?
  • Who is the competition? How are they different?
  • Who is the team? Is this their first startup? Do they have relevant experience? Why is this problem important to them? Why are they uniquely positioned to solve it? 

There is something to be said for the amount of research and preparation a founder has put into their deck; good leaders are often good communicators. 

3 Things That Impress Us While Reviewing a Deck

While there are always exceptions, the way in which a founder presents themselves and their company for the first time can communicate a lot. Here are a few characteristics that impress us when looking for signs that a founder is organized, thoughtful, and well-researched.

  • A Strong Opening Email: Context and key data points in an introductory email should make you want to open the pitch deck, as should easy access to relevant links like a deck, website, and/or founder Linkedin pages. (See below for an example of a strong opening email.)
  • Quantifiable Traction: Financial traction and unit economics – If you have a product/service in market, I want to know how much demand you have.
  • Design & Story: Clean, simple, and visually appealing design that makes understanding the story easy and enjoyable is important for most companies, but even more critical if the company leads with brand. Slide headlines should tell a story. Founders should ensure an investor can get 70% of the pitch from the slide titles alone.

3 Things That Give Us Pause While Reviewing a Deck:

  • NDAs: Unless we are investing in deep tech/ life sciences, there is rarely enough at the early stage to justify an NDA and, from a legal perspective, it’s untenable at scale.
  • Lack of Competitive Positioning: Every company has some sort of competition and the omission of that from a deck is worrisome. Either, a founder doesn’t understand the landscape well enough or they are choosing to leave out that information. Neither of these things is ideal and it’s often one part of diligence where we suggest you spend a fair amount of time. Meaning, even if a deck includes a competitive landscape it’s incumbent on you to not only cross-reference the ones included but identify other competitors. Alternatively, if there seem to be a high number of incumbents or if you’ve already seen a half-dozen decks that are pitching the same product or service, make sure you have a clear understanding of how and why this company is uniquely positioned to do it much more effectively. 
  • Overuse of flamboyant language: Stating the company is the “best”, “only”, “first”, or “premier” lacks thoughtfulness. Building trust and authenticity starts here and the deck should reflect that.

Step Two: Have an Intro Call with the Founder

After we’ve read the deck, if we are interested in learning more, we will schedule a short (usually 30-minute) meeting with the founder so we can hear them tell their story in their own words. When you are investing at the earliest stages, as most angels do, one of the most compelling reasons to invest is often the founder. To that end, these calls should be conversational in nature. It’s an opportunity for you to get a sense of who a founder is, what motivates them, and why they are uniquely positioned to lead it. Should you invest, it’s likely you will be in business with this person for 7+ years, so a clear understanding of who they are and what their vision for the company is paramount.

Here are a few questions you can use to guide the conversation:

Origin Story

  • Why did you decide to start this company?
  • Why you? Why now?

Founder Dynamics & Team

  • How is your experience relevant to the company mission?
  • Who are your co-founders? How do you divide responsibilities? What unique skills do they bring to the company? Has anyone left?
  • Who is working on the company full-time?
  • What is the equity split between you and your co-founders/founding team? Note: 65 percent of startups fail because of co-founder conflict so we recommend you evaluate team dynamics thoroughly and early on. 

Traction / Strategy

  • What are the relevant metrics, milestones, or strategic partnerships you have achieved to date?
  • What is your go to market strategy?
  • Can you walk me through your product roadmap?

Revenue

  • What monetization strategies have you considered?
  • What are the per unit economics? CAC/LTV?
  • What is the path to profitability?

Previous Fundraises

  • Is this your first fundraise?
  • If not, how much have you raised and from whom? Note: It is important to understand the cash flow needs of the business as well as the ownership stakes. If a founder has raised millions of dollars and doesn’t have a product in market, you want to understand why not. If they have raised multiple rounds of convertible notes and experienced significant and/or unexpected dilution, aim to figure out what is incentivizing them to stay.

Current Fundraise

  • How much are you raising?
  • On what terms and on what type of security? 
  • How long have you been raising? 
  • How much of the round is committed? 
  • What are you looking for in an investor? 
  • What is the use of proceeds of this round? 
  • How much runway will this financing round get you?
  • What milestones will this money allow you to hit? Note: Typically we want to see the fundraise provide 12-18 months of runway to give the founder time to operate before they have to start fundraising again. We want to make sure they’ve thought through the amount they are raising and allocated it towards a clear roadmap with predictable success indicators.

     

Step 3: Begin Due Diligence

Due diligence is the term used to describe what an investor does to evaluate a potential investment opportunity. At this stage, we typically send them our founder questionnaire and ask for access to their data room.

Founder Questionnaire: Founder questionnaires, like ours, are often proprietary but you can find an example of one you can modify here

Data Room: Below is an example of what a data room should contain. We will deep dive into how best to analyze these documents in our next module. 

  • Detailed capitalization table
  • Last 12 months’ profit & loss (P&L) statement in excel by month
  • Next 12 months’ P&L in excel by month
  • Current balance sheet
  • Convertible note ledger
  • Last 2 months bank statements 
  • Customer list (contract value, length of contract)
  • Pipeline of customers (stage of conversation, probability of closing, expected close date, expected revenue)
  • Current term sheet
  • User metrics (DAU/ MAU, Growth/ churn, CAC/ LTV)

It’s important to pause here and note that no diligence process is exactly the same. The questions you ask and diligence you perform will vary due to things like the founder and team, terms of the deal, industry, traction, and/or monetization strategies to name a few. It’s incumbent on you, the investor, to consider what information you’ll need in order to have conviction about an investment and to go out and ascertain it.

In addition to the data aforementioned, here are a few other things worth inquiring about:

  • Age of the Company – How long has the company been in business? Have they accomplished what you would expect them to accomplish in that time? For example, if they have been working on it for 4 years and they don’t have a product in market yet, this is likely cause for concern
  • Testing the Product or Service – If it is a service, have you seen a demo of the technology? If it’s a product, have you tried it? What was the customer experience like (Ordering, Shipping, Packaging, Product)?
  • Team – Is the founder’s experience relevant to the company mission? Why are they passionate? Will they quit when the going gets tough? Are they properly incentivized (equity/ comp)? Does the company have advisors or investors that are strategic to the industry they are operating in
  • Competition – What is their competitive positioning? How are they differentiated? What are the barriers to entry? What is the defensibility/moat?
  • Existing Customers – Do they have existing customers or pilots? Did pilots convert to paid? What is the average contract value? How many customers churned? If they churned, why? Are there customer testimonials or references? Note: Make sure customers are not partners (A customer pays for the product where a partner typically has a quid pro quo or in-kind agreement).
  • Customer Acquisition Strategy – What is their customer acquisition strategy? Is pricing reasonable? How much revenue value do they have in the pipeline? Does the founder or company have a social presence / notable mentions? Note: This can be important for a consumer-facing company.
  • Regulatory Considerations – If this is a regulated industry, what roadblocks or legal limitations are there?
  • Valuation – Is the valuation reasonable? Are there any comparable exits you can point to?

Step 4: Conduct Reference Checks

We suggest breaking references into a few categories. Below, you will find a few examples for each: 

Current or Previous Investors

  1. When and why did you invest? 
  2. Has the company hit the milestones they promised since investment? 
  3. Did you re-invest in the current round? If not, why? 
  4. Do you have expertise in the industry that you can share?

Professional References for the Founder 

  1. Can you tell us about the founder’s past accomplishments?
  2. How would you describe her management style? 
  3. How is she perceived?

Customer or Users

  1. What has your experience with the product/ service been like? 
  2. How many times have you used it? Over what length of time? 
  3. Do you pay for it? 
  4. What do you like and dislike about it?

Subject Matter Experts

  1. If you are investing in an industry that you are not familiar with, finding an expert who can speak objectively to the validity of the product/service, competitive landscape, and market opportunity can help you identify opportunities and obstacles you may not have been aware of.

Keep in mind that a founder’s time, especially during her fundraise, is precious. So, you should only be asking for her to set-up these diligence calls if you are far enough along in your process that you are moving toward writing a check. 

Up next in Module 4: We will dig into how to review the data room documents and, in particular, what to look for in the financial statements. 

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