Fundraising tip for B2B startups: Use speed-dating to handle due diligence

Gaurav Jain is a Principal at Founder Collective, an early stage VC firm based in Cambridge and NYC that has made investments in 150 companies including Uber, Buzzfeed, and Makerbot. He cofounded Polar and was an early Product Manager for Android. Follow him @gjain.

Before making an investment, venture capitalists conduct a process of due diligence. We do background checks on founders and key executives to make sure we’re not investing in convicted embezzlers. Industry reports and competitors financials are scrutinized to see just how insane the founder’s growth projections are.

We also spend time looking at your customers. In the case of consumer startups, it’s relatively straightforward. Apps have no shortage of fans or detractors leaving star reviews or comments on iTunes or the Play store. Hardware projects leave behind a trail on Kickstarter. But for B2B startups, the process usually means a VC will want to call your customers.

This is tricky for the entrepreneur. Your customers are buying your software to help save time. Now you’re asking them to spend their time on your behalf. This is potentially frustrating for the customers, risky for the startup founder, and a non-negotiable requirement from the VCs.

Smart entrepreneurs will try to load balance, sending VCs to different customers so none get burnt out. Still, if your customer advocate comes out of a bad meeting before they’re scheduled to talk to your potential investor, they could kill your entire fundraising process, while simultaneously become annoyed with your product.

Here’s the smart way to handle it. Throw a party.

I recently met with a team that was selling an impressive product to life sciences and pharma companies. The customers were busy, focused, and the product was still in beta. And it was a competitive early stage financing with lots of VCs interested.

This would typically result in the customers being inundated with requests for phone calls; their calendars would fill up with meeting requests, all for a product that was essentially a pilot.

So these founders flipped the script. They brought a few of the key customers out for a nice dinner, treated them like high rollers, and set up a kind of “speed-dating” system, where each VC got 30 minutes to talk to the customers.

Personally, I felt that 30 minutes was just enough time to understand the key questions — what is the use case? Who are the decision makers? How does this fit into the budget? And what is the early feedback?

Since I sat down with multiple customers simultaneously, most of the questions were a discussion instead of a 1:1 conversation. I was able to easily contrast the responses across customers and ask followup questions. The fact that the customers were willing to take an evening out of their schedule to do this was also indirect validation of the business and the team.

In addition to an efficient customer diligence process, such an event serves as the precursor to a customer advisory board. This is a great opportunity for the biggest advocates of the product to get to know each other and, if the timing is right, for the entrepreneur to ask some or all of them to advise the company in a more formal fashion.

It was win-win. The VCs got easy access to credible customers in one shot. The customers got a great meal and felt like micro-celebrities with VCs lined up to ask them questions. The founders managed to keep both groups happy (and had the benefit of getting both sides a little tipsy, hopefully keeping the conversations convivial).

This gambit also had the benefit of setting the team apart in my mind. If they’re able to find a solution this creative in a boring part of their business, why wouldn’t that mindset be transferable to their core expertise?

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