What Founders Get Wrong About Series B (Part 3)

(A version of this post first appeared in Techcrunch)

In Part 1 of this series, I reviewed why your Series B materials should capture attention, transfer information with high fidelity, and minimize work. In Part 2, I discussed your three most important materials that accomplish those goals. In Part 3, I want to discuss the rest of your diligence package and how to tie everything together.

Tie it up in a bow

Series B companies generally have sales, detailed cost breakdowns, forecast actualization records, patents, board presentations, etc. There is a LOT of information to go over because you have been around for a LOT longer than a seed stage or Series A company.

Your three key documents: memo, deck, and forecast, should do the heavy lifting of capturing attention and transferring information across the partnership with high fidelity. If done well, these materials, along with various phone calls and presentations you will make, will create the blueprint and backbone for an in-depth Series B due diligence process. This blueprint is important because someone will likely read every single document in your data room and you do not want them to get lost — you want to make their job very easy. The next set of materials falls squarely in the “minimize work” objective. By making things easy, you increase the chance that the outcome goes in your favor.

The best offense is a strong due diligence questionnaire

As an investor, I’m shocked that I don’t see DDQs more often. Not to be confused with a legal DDQ that will happen during the closing process, this DDQ is oftentimes a 60–80 page document divided into a variety of sections that answer questions that investors will invariably ask. Some questions will be straightforward such as:

• When and how was the company founded?
• Please discuss the company’s vision and values.
• How many employees does the company currently employ?
• Please summarize the relevant expertise and experience of the management team.

For these simple questions, the DDQ offers a good reference guide for investors. The DDQ also should include some more pre-emptive questions that investors like to ask such as:

• What additional key leadership hires need to be made?
• Please describe the environmental footprint of the company, vs. traditional products.

It is good to have time to think through elegant and cogent answers to these questions because they will invariably appear. Finally, there are the questions you don’t want investors to ask.

• What prevents your competitors from also doing the same? There does not seem to be a technical moat to your business model.
• Your business model requires a lot of CAPEX. How much capital do you need to raise and how much should investors in this round expect to be diluted?
• Many startups have tried this exact business model like X and Y. What makes you different?

The DDQ is an excellent opportunity to defuse these tough questions upfront. They will come up — it is up to you to decide WHEN and HOW they come up. Include the most brutal questions in your DDQ — investors will respect you for it.

Some final thoughts on the DDQ:

1. Every firm has a slightly different investment memo format (not to be confused with the company-prepared strategy memo we have discussed), but the major sections are generally the same. Construct your DDQ in a manner that a very, very lazy investor could lift entire sections and create their own investment memo. They probably won’t… but fortune favors the bold.
2. The DDQ is a living document. Use a hosting site for your DDQ like Docsend so that you can continuously update the document with the best questions you get from investors. Answering questions before they are asked or even contemplated reduces the amount of work investors have to do.
3. The DDQ should link out to specific documents in your data room. In this way, it can serve as its own guide for navigating the data room. In fact, I like to think of the strategy memo, DDQ, and data room through the lens of an old-school research paper. (I am about to date myself…) If your strategy memo is your finished research paper and your data room is where you store all your primary documents, your DDQ is like your note cards organized in piles.

The escape data room

The major mistake people make is organizing their diligence data room like they would a legal diligence room. Lawyers probably want every single data room to look the same — here are your patents, here are your commercial contracts, and here are your employment agreements, etc. But if I am trying to match the story you have been telling me in your deck, forecast, etc. to primary documents, do you want me to jump in and out of generic folders trying to find information, OR do you want to guide me through the information exactly how you have done so in our every interaction? Don’t make your data room so complicated that investors can’t find their way out of the details into accepting your arguments.

A good data room is organized in the same way as the argument you are trying to create. If your narrative starts with an overall macro trend, zooms into the current competitor landscape, then talks about a technology breakthrough and how that breakthrough coupled with your amazing team and customer insights has lead to incredible commercial traction leading to great economics, then maybe your data room looks like this

1. Overview Materials
2. Market Landscape
3. Competitive Analysis
4. Technology Overview
5. Team
6. Customer Insights
7. Commercial
8. Finance and Metrics
9. Other

Organize your folders and sub-folders in a way that mirrors how you tell your story. When people start digging into your data room, your narrative is continuously reinforced. If you have done a solid job with your DDQ, strategy memo, deck, and forecast model, investors will breeze through a data room that feels like checking boxes toward an inevitable conclusion rather than hunting for threads in a tapestry they can’t clearly see.

Breakout Decks

Lastly, it is also helpful to have a few topic-specific decks. Think of these as deep-dive decks for key areas that are important to your narrative. If an investor doesn’t really want to go through the details of your go-to-market strategy across various marketing plans and product specs, a summarized overview of the competitive landscape, product differentials, customer archetypes, etc. in a more visual deck format can help transmit the information effectively.

These decks often form the basis for breakout meetings with other members of company leadership. At Series B, investors expect to see a much deeper bench around the CEO and I can say that my partners and I have direct relationships with multiple members of the management team in each of our companies. I even have standing meetings with COOs, VPs of Finance, etc. across the portfolio. These breakout decks allow those key members to shine and truly own their verticals. A CEO that keeps an iron grip on points of contact and doesn’t allow anyone else to talk independently with investors is a red flag at this stage!

We always do a full day or two onsite with our Series B companies and different departments present their respective decks. It’s wise to proactively create and distribute those decks so that the partnership has time to review them prior to those meetings and can also easily share them internally for those curious.

For Prime Movers Lab and our deep tech focus, the three decks that we generally see at Series B are a technical deck, a go-to-market or commercial deck and a manufacturing / techno-economic / financial deck.

Putting it all together

I hope that this overview creates clarity on the package of materials investors expect at Series B and how the materials work together in a system. Below is an overview of each piece of content and where it does its heavy lifting.

By keeping the information you provide tightly coupled with the initial story that captured investor interest in the first place, you create momentum for yourself within the partnership. Every piece of additional information and every additional point of contact creates MORE excitement.

I want to emphasize that the tactics and suggestions outlined above are not a recipe for ‘tricking’ investors. Real diligence that is beyond your control will be conducted: past employees and employers will be called as well as customers and competitors. Investors will not take your word for everything. If your company is not ready for a Series B, you will rarely even get a first meeting. The advice presented here will only help companies that have really good fundamentals. You have to have the goods, all the other stuff is window dressing that tips luck in your favor.

Prime Movers Lab invests in breakthrough scientific startups founded by Prime Movers, the inventors who transform billions of lives. We invest in companies reinventing energy, transportation, infrastructure, manufacturing, human augmentation, and agriculture.

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