So you've hit your pitch out of the park and engaged several VCs on your shortlist--congrats! Now that you have an open dialog with prospective investors, how do you maintain momentum as you continue the conversation?
A common misconception is that VCs decide whether or not to move into diligence immediately following a first meeting. While a VC might decide not to move forward at that point, there is often a subsequent discussion with other members of his or her firm before entering into a formal diligence process. This intermediate step is designed to save entrepreneurs time, your most valuable asset, as the last thing you want to do is to spend a great deal of it with a VC only to find that there simply isn't a fit because of something that could have been assessed at the outset of the process.
As a result, after a great first meeting many VCs will ask for a shortlist of information to help them get up to speed on your business. While diligence processes can vary widely from firm to firm, the following three key items will help any investor climb the learning curve on your business and quickly assess whether it makes sense to take a deeper dive.
1. Overview Presentation
While this could simply be your pitch deck from the initial meeting, an overview presentation typically includes a level of detail more commonly reserved for the appendix of a pitch deck.
This is one of your best opportunities to dive into the details and frame your business for a VC firm. The individuals you met at the pitch will reference it later as well as make the presentation available to their colleagues as additional context when sharing your story internally. Including additional information beyond what was in the pitch deck is critical as your story is going to be told by an investor who has just heard it for the first time, and no matter how many degrees they may have from MIT or how well they know your space, they are not you--so give them the best chance to get your message across.
While having the overview packaged as a single presentation makes it easy to share within a VC firm, it's not necessary and can often be pulled together from materials you may have on hand. For example, you could have a pitch deck to frame the story, architecture and engineering onboarding docs to dive into the technology, and a sales deck or other marketing materials to give insight into how you engage leads and prospects.
2.Committed Revenue by Customer or Cohort
Understanding how much your customers have committed to pay you and for how long is often the most helpful data point in understanding the maturity of your business. A wide variety of relevant metrics can be derived from this including average contract size, retention and upsell dynamics, as well as your revenue distribution by product to name a few. As every VC will care about slightly different metrics, providing this data in its most basic form will save you a great deal of time running variations on the same calculation for each investor you are speaking with.
The simplest way to represent this is in a table that shows the committed revenue of each customer, or cohort if your business has more than 100 customers, by month or quarter--whichever is more relevant based on your sales cadence. This simple representation becomes even more powerful by simply adding a column or two of metadata for each customer such as the product or service purchased, or the number of customers represented in a given cohort.
Alternatively, if you have not been tracking your business in this way, some venture capitalists are comfortable reconstructing this information from individual transactions. One method of reconstruction involves aggregating invoices from an accounting system export while another approach is to use bookings data (contract value, length of agreement, and implementation date) to approximate your monthly or quarterly committed revenue by customer or cohort.
3. Income Statement
An income statement with enough detail to breakout individual costs of goods sold, or COGS, and functional business units including engineering, sales, marketing, support, and G&A provides insight into many aspects of the business. Most importantly at this stage of the process, it can be combined with #2 above to derive the unit economics of customer acquisition and provide a perspective on the long term margins of the business. For example, one can tie the sales and marketing expenses in the income statement to corresponding customers and cohorts to calculate cost of customer acquisition--CAC, payback period, and lifetime value--LTV of your customers. Communicating these metrics upfront will help you quickly identify the VCs most interested in continuing the conversation and avoid getting several meetings into a process that could have been better qualified from the outset.
Unlike the overview presentation and committed revenue by customer or cohort, there is no substitute for an income statement or straightforward way for a venture capitalist to reconstruct one from foundational data. That said, there is no need for it to be audited or even strictly adhere to GAAP guidelines at this stage, just to represent where the business is spending and how revenue is being generated.
Bonus Tip--Forget the Business Plan...for Now
One common misconception is that the first thing you should prepare before seeking investment is a detailed model showing exactly how you will deploy the invested capital, typically by bringing in additional talent, and how that talent will drive the top and bottom lines as well as the product roadmap. While a critical piece of any fundraising process, as well as a valuable tool to pressure test your own assumptions about how much capital to raise, working through a detailed financial model is something a VC will do after he or she has decided--typically along with his or her partnership--to spend the time with you to push toward a term sheet.
If you are building a B2B software company, which happens to be our focus at OpenView Venture Partners, a detailed sales pipeline can provide critical insight into the next month or two if you are focused on the SMB market and for several quarters if you're selling into the enterprise. By including customer segment and product type along with the expected value, contract length, close date, and stage of each prospect, you can even demonstrate changes in your target customer segment or product distribution resulting from recent product releases or modifications to your go-to market strategy.
By walking into your pitch armed with an overview presentation, committed revenue by customer or cohort, and an income statement, you put yourself in a position to efficiently move forward with VCs that show continued interest while quickly disqualifying those for whom the business isn't a fit after a second look.