Founder’s Perspective: Overkill Seed Stage Due Diligence

Landing a term sheet at the seed stage is a big deal but not always easy to come by. Runaway fundraising timelines are a huge problem for founders (especially first-time founders). And a pattern I see all the time goes something like this:

1. Founders get introduced to a handful of VCs
2. One or two of those introductions pass right away
3. But one fund is interested and wants to lean in / spend more time
4. They ask for follow up materials
5. Founders take a few calls in the weeks after the initial intro
6. Every call or email ends with the investor asking for more stuff
7. GOTO Step 4

Squandering precious time in the first inning can and does totally derail early momentum.

If you find yourself in this kind of loop, you should see red flags all over the place. Seed investors willing to let founders spin their wheels endlessly...🤔

Reasonable DD Materials vs. Overkill DD Materials

Seed-stage investing is more about evaluating founders and markets than anything else. Sure, competition, technology, strategy, unit economics, and other topics are great to talk about.

Think about it this way: if your company doesn’t have employees, customers, or maybe even a launched product yet, isn’t it a little silly to insist on a 3 year financial projection model?

Your 5-year revenue projections at pre-seed are not real! ~ @martymadrid | post on twitter

Incentives to move quickly

By default, investors have little incentive to move quickly to get to terms on your deal. You must create that incentive by drumming up interest among other investors — i.e. by making your deal competitive.

Conversely, investors have every incentive to wait and gather as much information as you are willing to give them. Call after call and email after email, investors have much to gain by waiting to make a decision for as long as possible without giving you a final “yes” or “no.” Before you know it, you’ve sunk months chasing a term sheet with an investor who ultimately passes on your deal in the end.

What should seed investors need to get to a term sheet?

I’ve raised many rounds for my own companies and seen many more working with fellow founders and as an angel investor as well, the short list of DD “asks” appropriate for a VC to require for a seed deal (normal seed deal < $4MM) is:

• Pitch deck: A concise and compelling presentation that outlines the startup’s value proposition, market opportunity, and growth strategy.
• Phone calls: Interactive discussions between founders and investors to address any inquiries or concerns the latter may have.
• Product demo: If available, showcasing the startup’s product or prototype to demonstrate its functionality and potential.
• Sales slides and leave-behinds: Materials that provide insights into the startup’s sales strategy and customer acquisition approach.
• Cap table: An overview of the startup’s ownership structure, including shareholders, equity distribution, and any existing investors.
• Lightweight business model explanation: A brief explanation of the startup’s business model, particularly if it is pre-revenue.
• Lightweight financials and unit economics: Basic financial figures that showcase the startup’s viability, with a focus on key metrics and projections.
• Detailed explanation of use of funds: rationale for the amount of capital being raised and how it will be utilized…it is perfectly reasonable for an investor to want to know what you plan to do with the cash. At the seed stage, basically this should be synonymous with your hiring plan at least for software companies.

If you find yourself in a months-long courtship with one investor who keeps asking for more and more data and information that’s not on this list, walk away. Just say thanks for taking a look at the biz. But you need to spend time with other investors and get this show on the road.

This is your barbecue

Being direct is not rude. Setting expectations is not impolite. It is totally OK to articulate your timeline. There’s nothing uncouth about making “asks” of your own! For example:

Founder: “Hey this was a great call. Thanks for spending the time to go through some of our go-to-market assumptions. Do you have any other questions before we jump?”

Investor: “not at the moment. This was super helpful.”

Founder: “Glad to hear it. So timing-wise, I’m circling up with the other funds we’re talking to and asking everyone to come back with bids by end of day {{next week, in two weeks, on date_x}}. You probably have some follow ups on your side. Can I assume that you can be on the same timeline to get to terms by then?”

‼️Remember: you are the one selling the valuable thing to the VCs, not the other way around!!

If you found this post useful, you might also enjoy this one: Manage Due Diligence on Your Terms the Right Way

I’m on Twitter @austinogilvie and LinkedIn /in/austinogilvie

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