Creating Due Diligence material for Startup to raise capital

Creating Due Diligence material for Startup to raise capital

Transcript

1. Creating material for INVESTOR DUE DILIGENCE WhiteHat Engineering, Inc. Seattle Angel Conference Angel Portfolio 101 Bryan Starbuck Bryan@WhiteHatEngineering.com
2. This talk is about Preparing the material for DUE DILIGENCE for angel investors
3. TalentSpring Founder & CEO - Acquired in 2010 B2B Enterprise SaaS company with Artificial Intelligence / Machine Learning SPARKON Founder & CEO - 2011 to 2013 B2C Online learning & Passion Discovery Owner at WhiteHat Engineering: (Current) Our engineering team builds startup companies & products Bryan Starbuck STARTUPS & ENGINEERING Bryan@TheStarbucks.com
4. Understand how investor’s think
5. How investors think Will the target buyers LOVE this product? Will there be a very strong drive to START, STAY ENGAGED, PAY, etc. 1.
6. How investors think Is the market big enough? Will they safely get to $80m to $200m in yearly revenue? Otherwise, I’m not interested 2.
7. How investors think Is there a land mine that I’m missing? 3.
8. How investors think Can this team build this by replacing OPTIMISM with SOLID PLANS? (in their planning) 4.
9. DROPBOX Sharing dropbox after a great pitch, is the right next steps
10. DROPBOX Put your due diligence material on a DROPBOX so it is easy to share Don’t make them ask for access to GUST.com. Too much friction
11. DROPBOX What to Include: •  Pitch deck •  Product summary, features, roadmap •  Team background •  List of current/previous investors, mentors, advisors •  Customer/User testimonials/profiles •  Other supporting docs •  Funding docs – term sheets, closing docs This is a great list from T.A. McCann’s blog
12. DROPBOX Bryan’s CRITICAL TO ADD List: •  Customer acquisition plans •  Understanding the competitors. Risks and your plan to trump them
13. Projected Financials are VERY important
14. Projected financials Projected Financials are critically important •  Income statement •  Cash Flow •  Balance Sheet
15. Projected financials Projected Financials are critically important •  Income statement •  Cash Flow •  Balance Sheet Investors are GREAT at using them to determine these two kinds of entrepreneurs: Type #1: They do planning. The find and fix fundamental problems. FUNDABLE Type #2: Overly optimistic. They won’t FIND and FIX problems early on. DO NOT FUND
16. Projected financials IMPORTANT QUESTION #1: Head Count costs •  Do they factor in the real costs? •  How will this make expenses grow? •  Do they spend too fast? •  Do they not know how to plan later growth? •  Are the salaries smart? Realistic?
17. Projected financials IMPORTANT QUESTION #2: Total expenses •  Do they factor in the real costs? •  What expenses are in their business model? •  Do they spend too fast? •  Do they not know how to plan later growth?
18. Projected financials IMPORTANT QUESTION #3: Customer Acquisition costs •  Do they factor in the real costs? Or too optimistic? •  Is their customer acquisition plan HOPE and PRAY? •  Do they spend too fast? •  Do they not know how to plan later growth?
19. Projected financials IMPORTANT QUESTION #4: Transactions on a PER UNIT basis •  How do they sell in “UNIT”s? (Subscriptions, Ad bundles, etc.) •  How fast do those sales of units grow? •  Too optimistic? •  Will that actually get them to revenue targets? •  What is wrong, that I don’t initially see?
20. Projected financials IMPORTANT QUESTION #5: When do they raise capital? •  Is their plan on raising capital good or bad? •  Will they GO OUT OF BUSINESS if funding is greatly delayed? Do they spend too much? •  Will those investors, invest at that time? •  How does dilution happen?
21. Get a Rent-a-CFO I highly recommend hiring a Rent-a-CFO to finalize your projected financials. If you don’t know what “deferring recognizing revenue” is, then you absolutely need one. Investors have often run companies. They will find problems very quickly, if they exist. That will destroy their view of your integrity or competence. Incorrect financials VERY QUICKLY equals fraud. Get it right. Some great notes from T.A. McCann’s blog
22. Ask Bryan for a template I (Bryan Starbuck) have what I think is a very good template. Feel free to email me to ask for a copy. Bryan@WhiteHatEngineering.com Some great notes from T.A. McCann’s blog
23. Due Diligence Sections
24. Pitch Deck Pitch Deck: •  In PDF format •  Short version (6 mins) •  Longer (60 minute) presentations •  Include video, if you have one Some great notes from T.A. McCann’s blog
25. Exec Summary The exec summary is very important. Needed for VC intros. Investors want it for trusted intros. Some great notes from T.A. McCann’s blog
26. Information on the product Product summary Features Roadmap Product walk-thru screenshots Get the investor excited about what you are building Some great notes from T.A. McCann’s blog
27. Team Some great notes from T.A. McCann’s blog The team is very important: Bios & Resumes Let them get to know you better
28. Current investors and advisors Some great notes from T.A. McCann’s blog Let them get to know who is already involved: Current Investors Advisors Mentors and include contact info
29. Due Diligence Deck You can make a slide deck, full of AREAS plus PLANs in that area. I love to head off concerns. This would be advanced material. Some great notes from T.A. McCann’s blog
30. Customer Testimonials Include: Some great notes from T.A. McCann’s blog Customer Testimonials Customer Contact info Letters of intent The voice of a customer is very powerful. Show photos, bio info, how they found out about you, how long they have been using the product…If the customers are open to being a reference, note that as well
31. Other supporting docs Include market reports, press mentions… anything that helps support your perspective on the market and/or size of the opportunity Some great notes from T.A. McCann’s blog
32. “Go to Market Plan” “Go to Market” plan == Customer Acquisition plan Include this. Investors need something they believe will get you there. Some great notes from T.A. McCann’s blog
33. Use of proceeds I keep this to a one slide short summary. I redirect investors to the projected financials to get the “texture” of how everything is planned to roll out going forward. Some great notes from T.A. McCann’s blog
34. An FAQ document is a great way to handle “Objections” that investors have, when you aren’t around FAQ Some great notes from T.A. McCann’s blog
35. Legal Docs Term Sheet Articles of Incorporation Convertible Note Cap Table Employee agreements w/Assignment And more. Ask your attorney Some great notes from T.A. McCann’s blog
36. PROFILEs on Angel List It can take several days to fill out a full profile. But investors will go there often. The video is important
37. PROFILEs on GUST.com They are a great place to store due diligence information Some great notes from T.A. McCann’s blog
38. And more PROFILE pages Some great notes from T.A. McCann’s blog Twitter Facebook Linked-In Crunchbase
39. Raising Capital
40. Treat it like a SALES PIPELINE “Source Leads” Angel list. Linked-In. GeekWire. Much, much, more…
41. Trusted Intros Get Trusted introductions. night and day difference
42. Investor flow This is good with individual investors: Get intro. Walk thru deck over coffee. Let them ask questions. Send them projected financials & dropbox right after Schedule next meeting. Answer their questions. When remaining questions == zero, then see if they want to invest.
43. Finalize investments Many new founders, are product builders. Get good at sales: Close, close, close. It is easy for the investment to never finish.
44. Work in Tranches Start with a list. Work on moving them along. When several have dropped off, line up meetings with the next batch.
45. Learn from CLOSE-RATIO Measure your close ratio Learn from a lower ratio than your goal. Learn. Grow. Do better. INVESTOR’S FIRST MEETING MANY MANY INVESTED = CLOSE RATIO
46. Convertible notes Use Bryan Starbuck’s model of convertible notes. Extra WARRANTS for first several month tranches will get your first $300k. Finalize investments along the way. Don’t build up and close later. It becomes infintely easier after the first $300k. Get past the first $300k.
47. THE END