Brady Forrest Talks Due Diligence
A little while ago, the startups of the Fall 2015 class went through the first round of a little something we call “due diligence workshops,” which might sound scary, but are in fact only slightly frightening. Maybe.
To find out more about what they are and why our startups experience them, we sat down with Highway1 VP Brady Forrest himself.
What are these due diligence workshops about?
When you’re trying to get investors, you go through a lot of different meetings with them. The first one is usually a get-to-know-you kind of thing, then at some point you go into a phase called due diligence; that’s when they start really examining all your paperwork: are you incorporated properly? Do you have the money you said you did? Do you have the patents you claimed you had? Does everybody work for you? Is that legal?
They might evaluate your code; maybe they interview your employees — they really get to know you very, very well. A lot of companies go through countless investor meetings before they find the one who says “Yes, I’m going to bet on you.” What we’re trying to simulate with these due diligence workshops is something that happens right after Demo Day.
Are the workshops new, or have they been going on ever since the start?
We started this in our third batch; this is the latest evolution of it. Now that we’ve seen how valuable it is, we’ve opened it up and asked all our investor mentors to come in and really dive into our companies. What we’ve found is that it really comes down to practice: every startup’s pitch has a lot of obvious holes in it, and this lets them find out the 20 most common questions they’re going to be asked every time.
Now they can develop the right answers or rebuild their decks with them in mind, and they can start moving on to the deeper questions with potential investors sooner.
Whose idea were they?
The expansion was mine, but the original idea came out of some material that Marcus Gosling came up with when he joined the program last year. Marcus introduced the idea of these brand and customer talks, where the startups would speak in depth and a bunch of invited mentors would listen and provide feedback. With the next cohort, we decided to make it more like an investor meeting. We did brand, customer, and business model sessions.
The teams told us the session with the most value was the business model one, so we decided to double down on that. This time we’re doing two 2-week sets of just tons of investor meetings, with an average of five 1-hour sessions per team.
Is there a common mistake you tend to see in the early versions of these sessions?
Lots of startups expect it to be their normal pitch where they get to talk and the investor listens. The reality is that investors don’t have much time, so they’ll tell you to skip, they’ll interrupt you, and you need to be prepared to answer their questions.
You also need to be prepared to guide their questions and make sure they’re learning what you want them to learn. If you realize an investor isn’t “getting it,” that there’s some subtlety or nuance to what you do that’s significant, then you have to find a way to explain it to them. They’re not just going magically understand what you’re thinking; it takes a lot to figure out what these folks want and need from you.
What do you hope the startups take away from these sessions?
The #1 thing is to find out where the holes are in their deck, and get polished at pitching to money. The first time you’re presenting to someone who really matters (outside of the Highway1 process) is really significant, and it needs to become something you’re just used to. When you’re pitching at Highway1, we’re pretty forgiving about folks being casual or unprepared or kind of figuring it out; we’re here to coach, that’s our model. But investors aren’t necessarily willing to put up with it or able to look past it.
Folks meet with investors, and it’s possible that a given investor might’ve been interested in them, but they were too early and flubbed the meeting — and it’s not that the product or the idea is bad, it’s just that they weren’t as polished as that investor’s used to. That’s what we’re trying to deal with here.
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