Building DUE DILIGENCE material for startups raising capital

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.
MANY MANY INVESTED
INVESTOR’S FIRST MEETING
= 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