Pre-Diligence: What I Try To Learn During My First Call With A Startup Founder

As a disclaimer, I want to say that everything I write is from personal experience.

Investing in early stage startups is a high-risk game. Here’s a fact for you: 90 per cent of all startups fail. Many others will only return the money you initially invested into them, leaving you exactly where you started — no loss, no gain, i.e. break even. So you’re essentially making a “calculated bet” on the remaining small per cent of startups to make it BIG!

Coming back to the topic at hand, how do early stage investors identify a unicorn or “the-next-big-startup”? It’s not exact science, but there are ways to identify good startups. One thing that everyone at a VC firm does is bring interesting startups to the table i.e. what we call generating deal flow. How do you decide whether something is interesting? One way is by looking at the source of the deal — how did you get to know about a company? Was it referred to you by someone you know and trust? Did you catch them at a pitch event? Was it a cold email? Often times referrals and pitch events are a good validation of the startup’s credibility. Cold emails, not so much (not to say it doesn’t work). I review most of the cold emails I receive and then based on the startups/deck, decide to take calls with the founders to better understand the business. Any founders reading this, feel free to slide into my DM!

I have a simple checklist, a template if you will, which I fall back on to learn more about the company. Here’s what a typical call with a founder looks like:

1.Introduction: I usually go first. A little bit of context to the conversation helps –– who I am, where I came across their startup, what attracted me to set up a call etc. Next, I introduce Scrum Ventures. Extremely important to introduce your firm. Why? It gives founders a better opportunity to understand how the firm invests, what the check sizes are, if there are particular geographies we invest in (which is true in our case), what the typical diligence process looks like, etc. — things that matter to set the tone for the rest of the conversation. I also throw into the conversation the history of our fund, our portfolio companies, what we bring to the table outside of capital or what I call the ‘secret sauce’ (click here to read more about Scrum Ventures and why I joined them). The reason I go first is to make the founder feel comfortable and hand them a few points to tie their story into (if they have not done their homework, but 99% would have!) Then they pitch. And later, I probe further.

2. The Product: In my experience, founders tend to focus less on this part, and more on everything else. Here’s something every founder needs to know, 9/10 the first call doesn’t land you a check. The intro call is an opportunity to learn more about the startup, product and the history of the sector. How are people solving this problem today? I have repeatedly requested founders to take me through the product both from a working and technical sense. If the person you’re speaking to doesn’t understand the product or doesn’t see a proper fit with the firm’s investment thesis, then you’re fighting an uphill battle to begin with. Chances are you are not going to receive a follow up call. A few other things I spend my time learning about tend to be around various use cases, customer journey, customer feedback and how that was used, product development and roadmap. Personally, I also like probing about traction and understanding PMF. At the seed stage, not every startup has traction, but that’s ok as long as there’s something else that’s attractive — the product, technology, IP, team etc.

3. The Founding Team: I do my bit of the research about the company I’m speaking with — the founders, media mentions, previous roles, the origin story and read through the pitch deck. At an early stage startup sometimes you’re betting on the people and the business itself comes next. It’s important to establish how much relevant experience the founding team collectively has in the space to build the business and why they are best suited to do so.

I also try to learn about how the co-founders met each other. 8/10 successful startups have had founders who have known each other for a while. Either they have worked together in the past or have been friends, or known each other in some capacity. Here’s a good read on co-founders. I’ve personally not spoken with founders who haven’t had prior experience in the space as their startup, but I’ve been in meetings with colleagues where we’ve discussed the the lack of experience of the founding team to execute a problem in a relatively unknown space to them. It can go either way depending on a number of things. Will discuss this at length in another blog.

4. The Traction: Coming back to one of my favorite topics and by far the easiest way for someone to buy into your story — traction. What exactly is traction? It simply describes how far your startup has come. It encompasses product development, sales, strategic partnerships, IP etc. If your story is around traction, make sure that it is heard! Now it’s my job to dig more to make sense of all this in the context of the market, growth opportunities and timing. I focus on various versions of the following topics:

• a) How many clients / pilot does the company have? (subtext: in relation to when the company started and the sales cycle)
• b) Any notable customers?
• c) How many more are in the pipeline (subtext: diversity in demand and scaling opportunities)
• d) What is the monetary nature of the traction (subtext: paid pilots or trials, and how much does the client value your product during this “nascent” stage)
• e1) What is the MRR/ARR (subtext: what is the momentum generated around the traction)
• e2) What are some of the key metrics — Customer Acquisition Cost (CAC), Life-Time Value (LTV), engagement rate, retention rate, burn rate, churn etc.
• f) What is/are the source(s) of user base (subtext: where are users coming from? For both an enterprise (B2B) and consumer (B2C) product, where is the discovery taking place?)
• g) How does the startup look to scale? (subtext: do the founders have a clear plan to take this product to the next level and how are they going to do so?)

I can guarantee that you will jump off your first call and NOT have answers to all of these questions. And that’s ok. Most of this is only available to you after acquiring the data room, usually during the diligence process. The idea here is to leverage your call to extract maximum information as possible.

5. The Round: You never hop off a call without learning about the fund-raising process. We at Scrum Ventures don’t lead rounds, we always co-invest. Therefore it’s imperative for me to know if the startup has secured a lead investor. This internally gives us an indication as to who the lead is, thereby in a way validating the startup itself, or in other cases, if we believe the startup is very interesting and “hot”, we then try to make introductions to lead investors from our investor circle. It’s also very important to receive fund-raising information such as

• How much are a startup is raising
• What’s the valuation (pre-money or post-money)
• How much of it have they already managed to raise
• How much is remaining and open
• What kind of round is it (pre-seed, seed, Series A)
• Have they raised money in the past (convertible note, debt, bridge) and if so from whom,
• When they plan to close the round
• Are there board seats allocated in this round, and lastly
• What does the startup intend to use the capital for and milestones they plan to hit with these funds? Some of this usually pops up in the founder’s pitch itself, but if it doesn’t you might want to check it off your list.

6.The Notes: I make notes as and when the founder is speaking. I’ve gotten better at fast note taking. It’s a skill that’s extremely helpful over long calls where you can’t remember everything, worse if you have back-to-back calls with multiple founders.

TIP: In California you may NOT record calls without the consent of all parties (it’s a two-party consent law state), however in New York, you may (single-sided consent). Learn about the recording laws in your state. If it allows you to record, or if you have received consent from the other party, try to do so for posting notes or referencing it in the future. You can thank me later! ;)

Please leave your thoughts and comments below or share them via email (akash@scrum.vc). If you’d like to connect and talk, let’s do it. Reach me via — LinkedIn | Twitter | Instagram

About: Akash Bhat is an Investor at Scrum Ventures, an SF-based generalist VC firm investing in Seed and Series A startups. He is a former entrepreneur himself having run businesses (successfully & unsuccessfully) in India and been employee #4 and #5 at two startups in the US. Akash has Bachelor’s in Computer Engineering from PES University and holds a Master’s degree from Columbia University. He is also the host of ‘The Desi VC’, a podcast series where he interviews angel investors and venture capitalists investing in tech startups in India.