The Nuts and Bolts

Part 6 of Show Your Working: Understanding our DD Process

We all know that venture capital can be a bit of a black box. From opaque processes to complex deal structures to the alphabet soup of acronyms, to, well, our personalities, it is no secret that dealing with investors can be wildly frustrating. So in an effort to lift the veil, we are publishing a multi-part series on our diligence process. Over the course of the series, we will cover customer pain, team, product, competitive positioning, the nuts and bolts, and the overall market. We hope that this will make things easier for founders, help them understand our decision-making, and be better prepared for their own ride on the merry-go-round that is taking investment dollars from a VC.

Details matter. You know this. But it is important for founders to understand why and which details matter. It all comes down to how we as investors interpret the countless little signals you give throughout the diligence process. Because perfect formatting and polish are great and all, but what we are really looking for beneath that is consistency, command of the basics, organized thinking, and the ability to maintain a coherent line of reasoning even under pressure. By the time we get to this stage, you should already have customer pain, team, product, competitive positioning, and market down. Hopefully, you have already wowed us across all of those areas. The last thing you want to do is lose momentum (and potentially, the deal) by tripping over avoidable obstacles. You gotta stick the landing.

Keep your story straight

It’s hardly earth-shattering to say that a founder’s narrative should be consistent, but when you really open that box, it is easy to see where it can all go wrong. Saying one revenue number in the pitch and then showing a slightly different number in the data is a big no-no. We can all agree on that. But there are other, more nuanced, areas where you can quickly lose the narrative thread. Do you talk about a specific customer pain in the meeting but all your sales materials talk about another? Is your TAM consistent with how you talk about your key market segments? Does your product roadmap match what you are telling us about customer usage? Are your assumptions about growth, pricing, or expansion actually reflected in the numbers you present? We are not expecting perfection and we certainly don’t think you should have all the answers, but we need to be able to pull at different threads without the whole thing unravelling. If it starts to feel like Jenga, we have a problem. And don’t forget that the perspective should be the same from every seat at the table - if every team member is singing from a different songbook, that is a major red flag. Alignment is all about doing the hard work internally to agree on what matters.

Jinal, Founder and CEO of Epoch, is an excellent example of what this looks like in practice. As we got to know him, a strong and cohesive story emerged of the kind of business he was building. Today: climate risk data around soft commodities. Tomorrow: the system of record for supply chain environmental data. He could articulate clearly what was true today, what needed to change, and how he planned to get there. Not a loose thread in sight. And that clarity extended beyond him to the wider team, in our interviews with them, to his materials, which told a cohesive story, and to his investor updates, which reinforced that story about how they were directing their focus. We love good stories, but we love narrative coherence even more. 

Know your numbers (and your limits)

There’s really nothing more satisfying than a two-word answer to a question on revenue. “It’s X.” Dream. Bonus points if we don’t have to ask twice. Having information at your fingertips is a great signal, especially in answer to obvious questions (like revenue). It says that a founder is across what matters in the business (important: not every metric deserves airtime), projects control, and avoids the long delays that are so often the killer of deals. Slow answers do nothing but create doubt. Fast answers build trust. It is also important to be able to articulate and explain your metrics. How you define ARR vs. revenue vs. bookings (trust us, this comes up more often than you think), the key assumptions behind any figures, and what is real vs. aspirational. Again, we are not striving for perfection here, but it is so critical to be able to lay all this out quickly and logically for investors. The faster and clearer your answers, the quicker you can get to yes. 

This is an area where Anne, CEO of Subeca, stands out. She could not be closer to the numbers that matter for her business and knows exactly what sits behind every one. No fluff, no scrambling, no “let me get back to you.” What we got in diligence were clear, fast answers to every question we asked, from revenue mix to margin to growth numbers, followed by precise explanations of the drivers and assumptions underneath. Just someone who is deep in the weeds in all the right ways. 

Get your house in order

Information hygiene goes way beyond color-coded folders and clean labelling. Although, don’t get me wrong, we love to see it. Maintaining a clean and organized data room is a massive signal to investors about how you run your company and your life. We lose confidence quickly in founders who project “sloppy” or “disorganized”. Messy materials often = messy thinking. And messy thinking rarely leads to great decisions. Michael of Cala Systems is one of the most disciplined thinkers out there - he is logical, organized, ruthlessly aligned to his north star, and constantly checking in on progress towards that goal. His manufacturing plans? Michael knows every detail at every level, down to where the pencil sharpener will go. We know this now, after working with him for several years, but signals of that approach were immediately clear the minute we entered his data room. Information hygiene was on point, and that gave us an insight to his leadership style (strong) and immense confidence in his operational discipline (high).

Under pressure

Nobody likes their business being picked apart, but the unfortunate reality of a diligence process is that it involves quite a lot of scrutiny, which can get real uncomfortable real quick (we know this all too well ourselves!). The good news is you can use this process to demonstrate live how brilliantly you operate and think, even under pressure. Are you taking note of what lands and what doesn’t, so that by the next DD call your answers are already 50% better? That tells us that tight feedback loops and fast iteration are part of how you operate. Major brownie points. Are you comfortable telling us when you don’t know something but can articulate how you are going to address that uncertainty over time? That tells us that you are honest and clear-headed about risks, but can also think logically about how to formulate plans around them. “We don’t know yet” is a perfectly good answer, as long as it is followed by “here’s how we will find out” (and maybe, “here’s how long it will take”). Having a business and an approach that stands up to questioning can be tough, but if you have done the work to build something great and honed the right muscles, this should hopefully be the time to shine. 

A great example of this in action is Barrett, Founder and CEO of Current Software. Throughout the diligence process, he iterated, experimented, and executed, showing up to each meeting with proof points that directly addressed our prior questions and concerns. Even the ones we told him were impossible to answer. That kind of responsiveness (and tenacity) is wildly impressive. It was a clear indication that tight feedback loops and a bias towards action were (and are) baked into how he operates. And he was consistently getting better over time. That’s performing under pressure.

Lights on

When it comes down to it, entering into diligence is kind of like turning the lights on in a dark room. Whether things are pretty messy or you’re living ready for the AD house tour, it is just about revealing what is already there. Nothing new appears, you just see everything more clearly. And although it may feel like a box ticking exercise, we promise you it is not. It is about showing us how you think and build, and this applies to each of the topics we have covered in this series - customer pain, team, product, moat, and market. These aren’t boxes to tick, they are signals of how you operate as a founder. Getting to the nuts and bolts is about ensuring those signals translate effectively into what VCs like us need to see as part of our process. So as much as this series has been about us showing our working, this is also about you showing your working. And it’s a lot more fun when everything adds up.

Ready to stick the landing? Then get in touch and tell us about what you are building in water. We'd love to hear your story and see your working.