WEBINAR SERIES (Pt.2): How to master an investment DD for your SaaS startup
This post is part of a three-part series summarising learnings from the webinar series on fundraising. You can find the notes from sessions 1 (here) and 3 (here).
You can find the presentation slides for this session here.
On Wednesday, June 9th, we had our second session on Due Diligence. This time the webinar was led by our CFO Anna Daviau and Xavier Sansó, Founding Partner at Metrix Partners.
As a quick reminder for those of you coming across this initiative for the first time, Nauta Capital and Metrix Partnersare partnering up to co-host a three-session webinar to shed light on what a Due Diligence process look like and what are the best practices that will help you nail the process for your SaaS startup.
Now that we have conducted two of the sessions already, we must admit that we are very excited about how the webinar is going and the engagement we are getting from the audience. It is, in fact, very enriching to receive all the feedback you are providing, as well as all the high-quality questions that foster our discussions. So, thanks to all the participants so far, please keep it up! ?
? If you have not participated in the last sessions, don’t worry. You can still sign up using this link. We would love to have you join us.
So, let’s get down to business. As you already know the webinar series comprises three sessions:
Session 1 – Before DD: How to prepare for investment due diligence (May 12th, 6pm CET)* The complete session can be found here.
Session 2 – During DD: How to run an investment due diligence(June 9th, 6pm CET)
* At the end of this post, you will find both the recording of the whole webinar and the slides presented during session 2 covering “During Due Diligence”. We recommend watching the whole webinar, especially if you are planning to join us for our next session.
Session 3 – After DD: How to return to business (July 7th, 6pm CET)
Extracting value-add from your DD work; how to manage stakeholders’ expectations and relationships; navigate towards the next round whilst building optionality.
If you are very busy running your business, finding opportunities to invest in or you just prefer to chill and don’t have much time to go through the full webinar video, we have prepared a summary for you. We hope you find it useful. Here it goes:
Takeaways from session 2, “During DD”
Objective: How should I run a DD process? How can I optimize my chances for success? Are there best practices that I should be aware of or specific details I should be paying attention to? Indeed, there are and we have learned them after having participated in many deals and building up on past experiences. In the end success in DD is defined by: (a) your ability to negotiate and close a round, and (b) your ability to run a robust process, which by the way is contingent on having done good preparation.
But…what is a Due Diligence? On this webinar, by DD we mean all the activities that kick-off immediately after signing a Term Sheet (TS), and that help the investor limit historical risk. Due Diligence is not only an audit, it implies performing some checks and identify issues (financial/legal/tax/tech) that may lead to future cash outs in the company (i.e. fines, tax adjustments, potential lawsuits). This cash out can have an important negative impact on the value of the investment.
In the session, we briefly discussed a large and strategic deal that Metrix advised on: Facebook’s acquisition of PlayGiga, the first acquisition ever of Facebook in Spain. This is a prime example of how to land investment and how to manage a complex DD process.
The most important learnings that came out of advising in that transaction, among many others, are the following. When you start a DD there are four main topics that are relevant:
The importance of having a solid and rigorous process.
DD is a human-to-human interaction. Communication is key!
It is important to be aware at every moment that the result of the DD should be a final reporting and the closing of the deal. If it takes too long, the DD can be counter-productive.
DD can be time-consuming and it is expensive, but it should not be considered a waste of time and money. We need to see it as a value-add effort that the company makes at a very specific moment in time.
⚙️ 1: Process, process, process
Follow the process and play the game. It is very important to understand the timings the VC has in mind.
In general, this tends to be the standard timeline:
1st step (2- 4 weeks) à Business Due Diligence and preparation before inviting you to an Investment Committee presentation.
2nd step (1 week) à Investment proposal and Term Sheet (TS) negotiation
3rd step (6 weeks) à External Due Diligence, after signing the TS. This step includes:
Drafting of the final investment agreements, managed by the lawyers, and based on the TS signed.
External DDs that are run in parallel (Financial / Legal / Tax / Tech)
4th step: Signing of the Agreements. Congrats you have your deal closed ?
If you are wondering what an external DD includes, below follows a brief explanation of each:
Financial DD: Ensuring that the accounting and invoicing processes of the company are correct and scalable. Checking that the historical figures presented during the business DD are accurate.
Legal DD: Checking that cap table is ok, that there are no issues with IP, that customer contracts include standard clauses, that employment agreements are in place and according to the regulation, among others. If you are looking for checklist, you have got Cooley’s (for smaller rounds) and Upcounsel’s (for larger rounds)
Tax DD: VAT treatments, transfer pricing analysis, corporate income tax
Tech DD: This part is very important and useful for founders and tech teams. It includes not only code reviews or basic pen tests, but also sharing product development and tech best practices. Identifying what processes are not scalable and where bottlenecks can appear. It will allow you to iterate and move faster across your software development lifecycle.
? Section 2: Build a relationship. Communication is key!
It is very important to understand that DD is not about checking the boxes. It is much more complex than that. You are trying to build a long term relationship with the investor.
Communication is key. Be transparent and honest with your potential investors.
Bear in mind that the founder is not the only one doing the heavy lifting. Please have empathy and be patient with the other side of the table! The investor is also having its own process, its own journey and is doing this to help you and understand you better.
? Section 3: Focus on closing the deal!
Stick to market standard clauses! Both the founders and the investor will have to give away on specific areas to close an agreement. Once the most important parts are sorted and you are comfortable enough with the deal, move on. You can spend ages negotiating and optimizing a deal, be practical! You have got a business to run.
It is very important that you understand your red lines early on. Negotiate everything in the TS, and agree on as much as you can in that phase. Do not open negotiations later when drafting the agreements. Avoid having the closing delayed!
Prepare the DD in advance, as much as you can. In general, the documents required are pretty standard. Your main job consists of gathering everything and be well-organized. This will send a good message to the investors because it means you want to close the deal fast.
? Section 4: DD will add value to your business.
The process is exhausting and time-consuming but will give you the chance to talk to top advisors. You will pay for most of this cost, so try to make the most of it and embrace it so that it helps you tidy up the house.
At the end of the process, the external advisors will share the conclusions and results. The investor should help and work with the company to solve and improve all the issues raised (some of them might be even unknown to you before the DD).
These conclusions can give you external views and opinions that can be very useful to make the company more scalable and fundable in the next phase. Take it as an opportunity to identify the weaknesses of the company and remember that it can create value for the future.
No company is perfect, there will always be red flags. You have to communicate them and provide actionable measures to fix them (before or after the deal closes).
DD is not a one-off. It is good training for future DD. If done appropriately, it is never a loss of time.
You can find the Q&A section in the recording, from minute 50 onwards. Feel free to check it out, it will be worth it ?. Even though we received lots of great questions, we did not have time to cover them all. We will try to address them in the next session.
The most important takeaway is simple: take DD seriously, it will be worth it.
You can find the materials on Session 2 “During DD” below: