Going through due diligence for an early stage start-up is at times daunting and mostly a complete time suck. However, people are trading money for opportunity and return on an investment so this work is expected and completely reasonable.
This past weekend I read a post from VC Mark Suster Both Sides of the Table blog — which I think is a must read for those seeking capital in the pro-VC market. He somewhat emphatically points out that a data room is a waste of time.
Data room or no data room?
During my first read, I was remembering personal experience of providing data room access across 6–7 financings. It was grueling and mostly pointless as the people who requested the information access typically did not follow up or continue the discussion. We chalked that up to lack of interest or validation in our materials but after getting Suster’s view, it was likely due to a lack of engagement with the investor. And that lack of engagement started long before the data room access was ever given.
We chalked that up to lack of interest or validation in our materials but after getting Suster’s view, it was likely due to a lack of engagement with the investor..
I think there are many ways to manage the information flow during a financing process that, as Suster pointed out, becomes a value trade. Here is one of his well made points:
For starters you have to realize that fund-raising is a sales process. The buyer is shopping for equity in startups and the seller is looking for cash in exchange for equity and shared governing control of his or her company. Asking too early for a the data room access is the equivalent of going into a store to look at clothes, watches, cars, electronics, etc. and then asking to take a brochure home with you. You are going to “study” the details before making a decision. Yeah, sure. A brochure is an easy out for you in the sales process without being rude. You know that you theoretically MIGHT want to look at the specs of that $5,000 coffee machine one day but in reality it’s likely to sit in a pile on your desk.
And the Suster post really expands on the dynamic even down to a script. Very helpful stuff.
I think the idea that an early stage start-ups Data is a trade for engagement and time is fair and reasonable. Ofter times in the press or through Start-Up worlds some VC’s tend to come off a bit elitist with their meetings and office hours, etc. This draws a line in the sand and makes a clear method of managing access and time while de-risking the entire process for all sides.
For our portfolio we will take this learning to heart and advise some changes to the typical I vestment diligence process. I’m sure Investment Banks and those who rely on all this readily available information while cringe but better relationships will form due to value being created on all sides.