Startups typically need to raise funds at several stages throughout their growth. A successful round of fundraising can secure the startup’s future while a failed round can have devastating effects. Yet as a CTO or technical lead, it’s easy to assume that fundraising is not part of your role.
I took part in multiple rounds of fundraising as CTO at Brandwatch, and investigated several startups as investment or acquisition opportunities - effectively sitting on both sides of the fundraising table. Here is an brief of what I came to expect of the fundraising process - how it typically works and a few lessons learnt along the way.
“So you’re competing with Google?”
The first step of fundraising consists in putting together a pitch for your company and showcasing it to potential investors, with the aim of finding a few interested parties.
As a CTO or technical lead, how much you are involved in this will very much depend on the management setup in your startup, your status as a founder, etc. But at a minimum you will be dragged in the odd early conversation with potential investors - to reassure them that your company does have the capabilities to deliver on its technical plans.
For early startups, these investors will most likely by angels and you might find yourself taking part in Dragon Den type of event. Just be prepared to be quizzed accordingly!
Let’s get serious
Eventually and hopefully an investor will be sufficiently interested in your company as to sign a letter of intent. The key terms of that letter will include:
how much $$$ the investor will put in your company and what share of the company they will get in return, hence a valuation
a period of time (often 1 month) for the investor to ‘look under the hood’ and make sure they will get what they were promised - this is the due diligence
The technical due diligence
A significant part of the due diligence will be dedicated to technical matters - that’s your bit! I’ve found the process to generally look like this:
one or two technical consultants are appointed by the investors (investors, including VCs, are proficient on commercial matters but less so on technical ones)
the consultants detail the scope of their investigation, ie what topics they want to focus on (infrastructure, architecture, processes, team, etc)
you put together a set of documents to cover these areas
a series of meetings are scheduled over a day or two, to go through the above and answer additional questions
the consultants report their findings to the investor - but they can often give you a quick summary right away, following up with a full report a couple of weeks later
And now for the bad news...
Having been through this exercise multiple times, a few observations are worth sharing:
1. Only bad things come up :(
By the time due diligence starts, both parties have agreed a valuation and have a nice, positive idea of how things should turn out.
But due diligence only brings up problems - minor or major issues which can at worst lead to renegotiating the valuation or even scupper the whole deal. Nothing positive can come up, really - all the good stuff’s already been said pre-due diligence.
Still...
2. Stepping back is useful
As a technical lead, preparing for a due diligence is a great opportunity to step back and take a 1000 mile high view on where you are, where your strengths and weaknesses are, how good your current structure really is, and so on.
It’s also a good chance for the other leads in your team to do the same. Make sure to involve them in the process.
3. External perspectives are insightful
Due diligence gives you the opportunity to hear what technically-savvy people from outside your company (the consultants) think about your setup.
These people will lack most of the context for why your team is setup in such a way, why your processes are such, etc. And this is great. It will make their advice and judgement even more valuable, not less. You will get a franker, more truthful feedback on where you need to improve, unbiased by the attenuating circumstances of context.
4. People are (generally) good
At this stage of the process, the investors want to start working with you on good terms - they're unlikely to want to play tricks. The technical consultants will want to do a good, thorough, unbiased job - they won’t try to pick the minutest inconsistency and 'score points'.
Similarly, I’ve found that tech leads (myself included, if I may) come across as honest about their work. They rarely try to hide significant problems. If anything because stuff always gets found out eventually, anyway.
So overall, people are typically good and honest during this process.
5. It’s an enjoyable disruption :)
Due diligence is hard work. It takes days if not weeks of preparation, on tight timeframes - and that work goes on top of your already extremely busy schedule.
Still they are a nice change from the day-to-day and can be surprisingly beneficial in the longer term. It’s ultimately an exciting way to find out how to get even better at what you do.
So even if you’re not fundraising right now, you could have a think about getting the benefits of a due diligence without all that it entails - get a consultant to come in for a couple of days and do a review of where you are. It should be worth it.
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