6 things to pre-empt 90% of Due Diligence

The founder of a portfolio company recently asked me what kind of numbers and other material he'll need when he goes into his next round of fundraising. He wanted to make sure that when he starts talking to new potential investors, he'll have answers ready to most of the questions he'll be asked.

That was a great question. By putting together a comprehensive set of data you can pre-empt 90% of the questions which investors will ask you when they assess a potential investment. This has a number of important advantages:

• It saves you time because you'll have to answer fewer individual questions and requests in a piecemeal fashion.
• It can speed up the fundraising process dramatically if investors get almost everything they need at once (or almost immediately upon request).
• It makes you look better, because it shows that you're on top of things.
• Almost all of the numbers (good) investors ask for are things that you should be highly interested in anyway, since they are important for understanding and running your business.

What kind of numbers you should prepare of course depends on the industry and stage you're in. I'm going to assume that you're a SaaS company and that you're going for a Series A or a Series B round. In this case, the following things will help you pre-empt a lot of DD questions:

1) A spreadsheet with your key metrics, since launch, on a monthly basis. It should include funnel metrics (visitors, signups, conversions etc.) as well as key financial metrics (MRR, CoGS, CACs etc.). If you haven't seen it yet, I put together a template for a KPI dashboard some time ago, which should serve as a good start.

You are probably tracking most of these numbers already anyway, so you can use a copy of your internal dashboard, but make sure that it's clean, comprehensible and that you're using the right terms.  If your dashboard contains any ambiguous metrics, add footnotes with precise definitions to make sure that an outsider understands exactly what he's looking at.

2) A chart with your MRR movements, since launch, on a monthly basis. That is, a chart that shows your new MRR, expansion MRR, contraction MRR, churn MRR and reactivation MRR for each month since launch.

MRR movements in ChartMogul

If you have a very wide range of customer size, consider breaking down the MRR movement analysis by your customer segments, because in that case the aggregate numbers across all customers may not tell the full story. So if you're selling to both SMBs and bigger enterprises, consider showing one MRR movement chart for the SMB customer segment and another one for the enterprise customer segment.

Make sure to provide the raw data along with these charts (and any other charts you provide) to allow the viewer to do his or her own calculations.

3) A cohort analysis, showing each monthly customer cohort since launch and how the cohort’s MRR has developed over time. I created a template for that, too. If you're selling to both SMBs and enterprise customers, you should again consider doing a separate analysis for each of the two segments.

Also consider adding a cohort analysis which is based on an activity metric. Think about what your key usage indicator is, then run a cohort analysis that shows the development of that number over time.

4) A financial plan for the next three years. The plan should follow the same logic as your historic KPI dashboard and should be relatively simple. Don't hard-code many numbers and make it easy to understand which assumptions the model is based on. Here are a few additional tips, and here's a template for a financial plan I built some time ago.

5) An overview of your customer acquisition channels. That is, a breakdown of your website visitors, leads and customers by source and data about your customer acquisition costs. 

Try to add some data points or estimates on the scalability of your customer acquisition channels. I know this is very hard and sometimes impossible, especially for inbound marketing driven companies, but some projections are probably better than having none at all.

6) If you're selling bigger deals, detailed information about your current sales pipeline. This should include a list of all qualified opportunities, and for each opportunity the potential deal size (in terms of MRR or ARR), pipeline stage and, if you have enough historic data to make a solid guess, closing probability and timeline. If you're a low-touch sales, high-velocity, low ARPA SaaS company you can leave this out.

Bonus tip: If you're an enterprise SaaS company, put together some additional information about your largest customers. Think of it as a little case study, with some information about how the customer found you, how the sales process looked like and how the account has developed over time.

What do you think? Does this capture most of the data Series A/B investors want to know?

[Update 5/8/2015]: I wrote a follow-up post with some additional details on what exactly SaaS Series A/B investors will look for when you supply them with the data and material mentioned above.]