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A word of introduction…

Good preparation for a conversation with an investor requires an understanding of his investment strategy and decision-making process, which we wrote about earlier (LINK to my previous article). In a word of reminder, typical elements of the analytical process are:

• Screening – initial matching with the fund’s investment policy in terms of industry, market size, stage of project development, traction, size of investment required, innovation. At this stage, the analyst will review the pitchdeck and perhaps invite an initial interview.

• In-depth analysis – Once the initial compliance of the project with the investment policy is confirmed, a proper verification of whether the information provided at the screening stage is reflected in reality follows.

• Legal and technological due diligence – Legal and technological due diligence may run concurrently with in-depth business analysis. Their purpose is to check whether the project has any legal (e.g., lack of documentation of IP ownership by the company) or technological (e.g., checking the code written so far before the originator) flaws.

From an interview preparation perspective, it is important to remember that different documents with different levels of detail will be required for each of these processes.

Why prepare quality investment materials?

The preparation of investment materials has two main functions:

• Communication with the investor.

• Internal validation and refinement of assumptions.

While communication with the investor is understandable, in practice the second function is often overlooked by originators. Preparing high-quality investment materials is a valuable process in itself, as it allows you to summarize and write down all assumptions about the business in one place. It forces you to do intellectual work again and verify the correctness of your assumptions, which translates into improving the quality of those assumptions. In other words, it is worth changing the approach from “We make investment materials for the investor” to “We make investment materials for ourselves and the investor.”

On the other hand, the quality of materials is derived from the level the originator represents. A sloppily prepared presentation, based on a market analysis done “by eye” and a static financial model with “off-the-wall” growths typed in, will effectively discourage the investor from further discussions. All interactions with the originator are evaluated by the investor in terms of the quality of potential cooperation at the project stage.

How do you prepare for the analytical process? Create a Dataroom!

It is good practice to conduct what is called “vendor Due Diligence.” This is a term taken from M&A and refers to the internal activities of an entity looking for an investor/buyer, which involves simulating the Due Diligence process that an investor would conduct. In the case of equity investments, it boils down to the preparation of a so-called “data room,” a place where all the information needed by analysts to analyze a project is contained. Access to such a data room can be granted when an investor shows interest in a project, going beyond initial screening. Among the advantages of creating a data room are:

• It allows verification that the prepared materials are consistent and complete in terms of content.

• Saves time for the originator, who does not have to coordinate the sending of emails with dozens of attachments.

• Allows materials to be updated on a regular basis, which is especially important for stalled deals.

• Saves time for the analyst on the fund side, leading to faster decisions.

• Increases the chances of receiving investment, as it shows the high level of operational efficiency of the originator.

The information in the dataroom should be tailored to the specific case and funding round. The following spread can provide inspiration on what information is relevant:

• “Team Presentation” folder:

  • Breakdown of roles and responsibilities, descriptions of key team members, description of advisory bodies, current investors and any other people/entities relevant to the project. It is also important to indicate the degree of time commitment and information on other commitments of these individuals.

• Product folder, product demonstrations:

  • Product demos.

  • Customer journey map, user stories or other ways to show customer interaction with the product.

  • Development roadmap of the product.

  • FAQs – questions asked by investors can be collected in one place and answered.

• Business model and market analysis folder:

  • TAM/SAM/SOM analysis of the market

  • Business model diagram

  • Competitor analysis with indication of advantages

  • Value added chain – demonstrating how the product delivers value to the customer. It is worth comparing the process before and after implementation. Ideally, it is possible to quantify the value the product generates for the customer.

• Business growth and clients folder:

  • Pipeline of clients with potential valuation of cooperation and indication of the stage of progress of talks,

  • Analysis of currently generated revenues,

  • Sales and marketing strategy adequate to the adopted business model and target group,

  • Feedback obtained from customers,

  • Case study of customer implementations,

  • Presentation of the sales process,

• Folder “Financial model containing:

  • Dashboard with charts and summary of model conclusions

  • A dynamic operating budget focused on revenue (and its growth rate) and costs (linking them to the scale of the business, and

  • Calculation of key metrics such as burn rate, Customer Acquisition Cost (CAC), Lifetime Value of Client (LTV), LTV/CAC ratio, Average recurring revenue (ARR), Monthly recurring revenue (MRR), Gross Margin, EBITDA Margin, cost per deployment. Metrics should justify the economic sense of investing in the project and must be relevant to the business model adopted.

  • Captable showing current stakeholders,

  • ESOP plan for key employees,

• Due Diligence Folder:

  • Legal information such as:- Articles of Incorporation, resolutions passed, agreements between employees and partners, authentication of IP held, confirmation of patents, ESOP agreements, etc.

  • Accounting and financial information, such as:- Past and current financial statements, debt information, current cash balance, statement of balances and turnover and turnover on an analytical basis, etc.

  • Dataroom should be “in the cloud” so that every person with access to it has up-to-date information. Internet drives such as Dropbox, OneDrive, Google Drive, or more interactive tools such as Notation, Craft.do can be used for the construction.

How to prepare for the interview?

Having investment materials prepared, the next step is to prepare yourself substantively and mentally for the interview. A common mistake made by founders is to assume that preparing materials is synonymous with being prepared for the interview. When coming to a conversation with an investor, assume the most difficult scenario, i.e. the analyst will be skeptical, have reviewed the deck superficially and expect the founder to inspire him.

Below we have prepared some advice for you to consider:

• The investor assumes that the way the originator approaches him shows the level at which he will talk to clients and investors for future rounds. If the analyst finds him unconvincing, this automatically casts doubt on his sales skills.

• Be prepared to give a project presentation in 5, 10, 15, 20 minutes to match the analyst’s expectations.

• You should prepare a 1-2 sentence capturing the essence of the entire project. This will come in handy many times, from cold emailing to media releases.

• Treat your first fund contact as the person who will represent your project to the fund. Help her prepare to talk to managing partners and build a good relationship with her from the beginning.

• Practice makes perfect – pitching is a skill that, regardless of aptitude, can be trained to at least a satisfactory level.