Diving In: What You Can Expect in the Investment Process

This is part 4 of a 5-part series. If you haven’t done so already, you can read the first three posts here, here, and here.

Navigating the fundraising process is often one of the most frustrating parts of running a startup. It can be slow, opaque, misleading, and even contentious. We at Laconia do everything we can to make the experience not just relatively painless but also productive for founders. Regardless of the final investment decision, we hope each of the founders diving in with us take away something useful from the work itself.

VCs are not all the same, so what you see below may or may not apply to any other firms. The short story is that we focus on operations, leverage our community, and build a strong partnership over the course of the process. In more detail, here’s what you can expect from us:


Discovery

The objective of the first one or two meetings is to determine whether this opportunity is a mutual fit. Because we make investment decisions by consensus and place a huge emphasis on relationship-building, you will typically meet our whole  investment team (David, Jeffrey, and Geri; interns too if they are around) within our first two meetings. Here are the questions we aim to answer in these discovery sessions:

  • Does your company fit our investment thesis in terms of stage, geography, and sector focus? More on our focus in blog #2. As a side note, occasionally we meet impressive founders who, for whatever reason, do not quite fit our investment scope. In those cases, we are happy to make introductions to VC friends and colleagues who may be a better fit.
  • Do we bring value beside capital to the table? We only make 3-5 investments per year and work side by side with our entrepreneurs in the first 12-18 months post-investment. We want to make sure that we are able to open doors for you and provide the operational support that you need at your current stage.
  • Do we get along? Investing is a long haul relationship, so we have to be able to work together.

Due diligence

If we are all in agreement that the answers to the above are “yes”, we will move into our formal due diligence process. We break the DD process into the three main stages below:

  • Stage 1 is centered on the operations of your business & your thinking around it. Across 1-3 working sessions, we will cover the following:
    • Financial statements (historical & projected) 
      • This part is fairly standard: revenues (especially monthly recurring), costs, margins, growth assumptions, revenue concentration, and so on. Having an intuitive and easy-to-follow model greatly works in your favor.
    • Sales, marketing, and distribution
      • Sales & marketing strategy as a lever for revenue acceleration
        • As former operators and entrepreneurs, we dive into all of the assumptions surrounding your sales process to determine what actually drives your numbers. We go into these meetings with the understanding that you know your business best and that we are here to offer insight and suggestions based on our vantage point. A sample of questions is below:
          • How are you segmenting and prioritizing your customers?
            • How do you define product/market fit? 
            • What are the components of your sales cycle, and what drives results at various stages of your sales funnel?
            • Is your pricing model right? 
            • How is your sales team structured? 
            • What will enable you to go from x% to y% market share? 
            • How can you meaningfully and efficiently scale your sales efforts? 
      • Market size with supporting market research
        • True market size numbers are hard to come by. We are not looking for a top-down data point for “total IT spend in X industry”. Segment your market fully and calculate every sales dollar you could feasibly close based on total number of potential customers and total revenue you could generate. Do this both for your current products as well as for future product development/market opportunities. In conducting this analysis, we are looking both for downside protection with regard to your current in-market product as well as the “big vision” that funding and growth  would enable.
    • Competition
      • Clearly map out your market position and unique value proposition relative to your competition.  We often find that competitive sets are not fully identified.
    • Capital structure: cap table, copies of convertible notes, debt, etc.
      • Far too often, we meet late seed-stage founders with multiple layers of stacked notes and limited understanding of everyone’s true stake. We will work with you on cleaning up your cap table, understanding the founders’ ownership, adjusting the option pool, and conducting scenario analysis for current/future rounds. Our top priorities are ensuring that founders are probably incentivized & that the company is as attractive as possible for future investors.
      • This topic includes discussion of current round terms. Are you raising the right amount based on your operating plan? What are the milestones you need to reach to trigger your next financing event? Does the valuation you want make sense given the stage of your company, and how does it align with your projected growth trajectory?  (More on capital strategy here). 
  • Stage 2: Once we have gotten comfortable with the above, we will start including others into the process as well. We will reach out to our LP base, comprised predominantly of family offices and high net worth individuals, to leverage their expertise and networks. We almost always get 3-5 responses with potential customer introductions that simultaneously give us real market insight and provide you with sales leads. While conducting these calls, we will make a few more document requests on:
    • Customer information: top customers, churned customers, etc. 
    • Product development: roadmap, development costs, execution risks
    • Management
    • References: customers, existing investors, potential target co-investors
      • We will hold off on calling any of your customers until the very end. Toward the end of this second stage, we will begin putting together the investment syndicate. We do not invest as the sole institutional VC.
  • Stage 3: This is the home stretch! The final items are tech due diligence, customer reference calls, and some more checklist documents.
    • Tech due diligence: infrastructure, tech stack, security, tools, etc.
      • For each tech due diligence call, we bring in one of our portfolio CTOs to lead. This approach allows us to leverage their expertise and also introduce founding teams to each other, which is key to the Laconia community we are building. As our focus is on applications of technology for high pain-point B2B problems, we often are not taking on significant risk with cutting-edge technology.
    • Terms & investor syndicate
      • The timing varies a bit case by case, but typically we will formally issue a term sheet post tech due diligence . We increasingly prefer leading, and we are open to co-leading or following if that makes the most sense for a given company. If we have not yet finalized the syndicate, we will focus all of our efforts on that now.
    • Reference calls: senior executive team & customer reference calls
    • Legal & tax documents: trademarks, litigation, tax returns, incorporation docs, etc.

While this may all seem overwhelming on paper, it is a highly collaborative and engaging process. The most important parts for us are deeply getting to know founders and building lasting relationships with them and the co-investors in the round. We can make an investment decision in as little as a few weeks, but seeing founders execute and showing them the way we work are critical to setting a strong relationship foundation. Most of all, we enjoy rolling our sleeves up side by side with founders and leveraging the growing Laconia community. 

Some final tips on managing your investment process if you are still awake:

  • Create a target VC list that makes sense for your company. Make sure a VC’s fund size makes sense for the company you are building (e.g. a $1b fund will have no interest in a company planning a $100 million M&A exit) and that its investment velocity aligns with what you need (e.g. a fund that writes 2-3 checks per week will not be providing the deep dives and hands-on support described above).
  • Prepare a deal room with your deck & the docs listed above prior to beginning your fundraising process.
  • Treat fundraising as a sales process. Identify your prospects, move them through the funnel, and close them.
  • Do your diligence, too. Call a VC’s existing portfolio founders and find out what they do, not only when things are going well but especially when they are not.

Next & final blog in this series will be on what it’s like to be in the Laconia family. What can you expect from our onboarding, community, and ongoing support? Keep an eye out. In the meantime, let us know if you have any feedback here or on Twitter - @jsilverman22, @djarcara, @geri_kirilova, @dleect.