A Founder's Guide to Appropriate VC Diligence
An article we liked from Thought Leader Chris Neumann of Panache Ventures:
What is Appropriate VC Diligence?
Founders get a lot of VC diligence requests during fundraising.
Most are straightforward, some can seem a bit odd and others can feel downright inappropriate. Here are 6 examples of appropriate VC diligence requests and 6 examples that should set off your alarm bells.
Financial Projections
✅ Appropriate: Asking for a Financial Projection
Many early-stage founders don’t understand why investors ask them for financial projections. Surely, if they were “good investors”, they would know that the numbers were pulled out of thin air and that the projections are completely inaccurate.
Of course we do.
The reason why VCs ask for financial projections isn’t because we expect them to be accurate, it’s because they give us insight into how you think. What assumptions are you making about customer acquisition, growth rates and pricing? How reasonable (or unreasonable) are your spending assumptions? And so on.
Ultimately, financial projections serve as an important conversation starter during the diligence process and allow us to better understand how you plan to manage the business (which is, ultimately, what we’re investing in).
🚩 Inappropriate: Asking for Itemized Financial Projections
While high-level financial projections are important to the diligence process, if an investor asks for itemized financial projections or starts debating small details (why are you buying lunch for employees once a week instead of once a month?), it’s generally a red flag. In particular, it can reveal an investor who expects to be involved in each-and-every decision and may ultimately act as a micromanager.
Moats
✅ Appropriate: Asking What Your Moat Is / Will Be
Similar to financial projections, many founders presume this to be a silly / lazy question.
For potential investors, it’s very insightful to hear how you think about long-term defensibility. Are you creating something you believe will become increasingly valuable over time? Are there aspects of your product/technology that are difficult to reproduce? Or do you think it’s all about first-mover advantage?
Regardless of the stage of your company or the industry you’re in, investors want to know how you’re thinking about competition and defensibility. (Packy McCormick recently wrote a great post on how early-stage startups should think about moats.)
🚩 Inappropriate: Asking What if Google Builds This?
For companies that are adjacent to a large incumbent or planning to go to battle with one, asking “what if Google/Facebook/Salesforce/Open AI/etc. builds this?” is a valid question (particularly if it’s not yet clear whether you’re building a “product or a feature”).
But in many situations, it’s just a lazy question. Yes, you should answer it seriously, but if an investor is trying to...
Read the rest of this article at chrisneumann.com...
Thanks for this article excerpt to Chris Neumann, Partner at Panache Ventures.
Want to share your advice for startup entrepreneurs? Submit a Guest Post here.