Poshly recently closed its second round of funding oversubscribed, raising $1.5 million in less than 10 days. How did we do it? The answer may seem boring, but there’s a critical lesson I must share with start-ups looking to raise moneyâinstead of eyebrowsâfrom investors.
One of the secrets to our fundraising success was having a well-developed due-diligence package prepared in advance. Since we closed the round, investors have told me that Poshly’s comprehensive package not only sped up the process for funding but also was beneficial in providing the full picture of the business, something they said is not common among early-stage companies.
Creating a due-diligence package that wows investors does not have to be a time-consuming process, and there are some best practices I can recommend.
Before diving into the details, what is due diligence, and why is it important? Due diligence is the process in which an investor looks more closely at your company to determine if all the T’s are crossed and I’s are dottedâthey want to make sure there are few risks with the company and that everything you’ve presented so far checks out.
As part of the process, investors might ask for documents showing financial history, corporate governance, contracts with clients and partners, team references and more. The more you have of that diligence compiled ahead of time, the more seamless the process will be. Here are four things you can do to get your things in order and thus speed up the time to get funded.
1. Pick a cloud-based document tool.
When putting due diligence into a private “data room” for investors to access, there are going to be a lot of documents, and you might make changes and updates to those documents over time. Rather than collecting documents into a folder on your computer, zipping the file and attaching it and emailing it to an investor, consider using a cloud-based solution, like Box or Dropbox. Using these kinds of tools will give you much more control and bring a lot of ease to the due-diligence process.
In particular, make sure to upgrade to a solution that has in-depth permissioning capabilities. You want to make sure your corporate documents stay confidential and that you can tightly control who has access to your due diligence.
2. Organize documents into business topics.
Rather than dumping all of your documents into one folder, create a clear organization to the documents by creating a folder layer. In particular, I grouped due-diligence documents into the following sections:
- Financials and Governance
- Insurance and Intellectual Property
- Market and Competitive Landscape
- Samples of Client Contracts
- Selection of Press
- Team and References
- Technology and Product
You can adjust the folder sections to your start-up’s unique structureâas long as there’s a layer of organization to the documents that aligns with the format of a business plan, it will be beneficial to investors who are reviewing your company.
3. Involve your team.
There can be quite a lot of detail in your due diligence, and having the right team is important for the document compilation process. For example, you can delegate the Financials and Governance section to your accountant to build out, the Team and References section to your HR director and the Technology and Product section to your CTO.
When using a tool like Box, which provides granular levels of access, you can always invite someone to collaborate on building out a folder and then remove them from the due-diligence package once it’s ready for investor debut. Working with your team to build out the due-diligence folders not only ensures that the data room will come together faster but also that it will have more expert-level analysis and insight, since each expert in his or her part of the company is contributing to the due-diligence process.
4. Add and expand the data room.
Don’t think of your due diligence as fixed. What is great about the folder approach on a cloud-based tool is that you can easily adjust your documents and add to the folders over time. This was extremely helpful during Poshly’s due-diligence process. I thought of the folders as a living database for our corporate documents. As the company hit new milestones, or if a prospective investor requests more information about a topic, we could easily update or add to the due-diligence folders to benefit all the investors looking at the deal. This prevents redundancy while giving investors the information that they need, updated in real time.
Getting a term sheet is a critical milestone in the fundraising process, but there’s a lot of work to perform after that to get the deal done. Due diligence is typically one of the most time-consuming elements of the funding process. But with these best practices, you can speed up the time and make the process painless for you, your team and your investors.
âBy Doreen Bloch, founder and CEO of Poshly