16 - The Importance of Data Rooms with Federico Wengi

Today on the eWarpotcast, Fidrigo Benji, on why you need a data rule when raising funding. Hello and welcome to this episode of the eWarpotcast. My name is Liao Burma and this is the space where founders and investors share the lessons they learned along their journey, so that you don't have to learn them the hard way. Today's guest is Square 1 venture capital partner Fidrigo Benji. Fidrigo has a background in finance and statistics. He worked in a few investment banks before joining Fluncchio as an entrepreneur in residence. In 2012, he joined the recently founded Square 1. Since then, Square 1 has grown into a pen European seat and pre-seed investor with a strong focus and B2B enterprise software. About 20% of the fund is reserved for deep tech investments. Fidrigo mainly invested in open-source software. Fidrigo is great to have you today. Hey, good to be here, Leanne. Thank you for having me. We're excited to have you and I heard that you were one of the roughly 120 investors that joined the very first eWarpotcast. What did you think? I mean, it was great. More specifically, I really liked that there were very early topics. Companies that I didn't hear all before had a good technical depth, interesting founders. So generally speaking, a lot to like also considering it was a very first. So can only get better from here. So very excited also about the second one. We're excited to see you again. We think of connected slightly after the grand pitch. And we got talking and you shared that a lot of the first time founders not only in our pitch, but just in general that you encounter in your work. Another often very well prepared for what's happening after the pitch. And so we thought let's just make a podcast on that so people can learn about it. So maybe where to start. Like let's just start at the founder just pitched to you. And you're interested to learn more. What happens next? Like what do I need to know as a founder? It's a very good question. And let me before I answer this directly, let me make a general statement or a general reminder. So there is processes at venture capital firms are different. So every firm you speak to they have a different process. So I guess this is the first important thing to know there are some common traits. I mean, we are all basically doing the same job. But there is no kind of accepted standard to what the process should look like. Therefore, take this into the perspective and don't forget about it. Then coming to your question, the general speaking in our process after the first pitch, then usually I'll ask a few basic documents. Like a budget, like the cap table and maybe a competition overview. There is not already one in the deck. And then with these documents with the deck and the notes that I took into the first call. Then I'll do a first assessment. And usually if it's something that I'm interested in, then I would jump on a second call during the second call. I would mostly clarify doubts that I had rereading all the materials. And once I have that, then I can go to my team with a recommendation. Usually if I take it to my team, it means I want to then go further. If it's something that I don't consider investment material, I don't present it to my partnerships, of course. And then let's say that I think it's interesting. I presented it to my team. And then I start feedback from the team and the feedback can be, hey, I think it's interesting. But something is missing on the some information is missing on the market size. I'm not convinced on the team composition. They don't have a CTO. Can you can find out more why? And then at this point, I also decide then based on the feedback. Do I still want to take it further or not? Should the answer be again? Yes. Then I usually take another investment manager or partner or associate and reform a team of two. And then we take it further from there means that based on the feedback of the team, we try to answer those questions. And should the second person that works a little bit as a four eye principle also be excited about the deal. And we'll go again to our team and say, hey, we answered this question. We're both now the team of two is excited about the deal. Let's take it to the next level. And at this point, we usually start to engage our network of experts on the matter. And then we start to evaluate the data that it said using sales enablement. Then I would reach out to head of sales into our portfolio into our network and start to validate the pain, the problem and the solution. And in parallel, maybe we start to start, you know, hearing out in the market. If someone knows the founders, what are they like and so on. And then this reference checks turn turn positive. Then we go to an I see where basically we invite team either to our office in person or via zoom call to have us find out, you know, about one and a half to two hours meeting where they meet the whole partnership. So that we can issue to the course between the experts calls and they see there are touch points with the team, but that is very much dependent on what are the findings, what are the things that our market experts and reference tell us a bit of a long answer, but I wanted to go into the different details and what was health code. And it sounds like quite a process that at least in your venture capital firm is going on if you're interested in it, you how long does it roughly take this process that you just described. Yeah, I guess it depends on on a few things. So I'll tell you what depends on and then a range of time. And the deal that is very early and it's a small check side that say it's a precede where there is only, you know, two founders and a couple of people, pick more up in a territory or in a vertical that we know very well. And the shortest deal ever because we know the market and only to get educated, there is not so much that you can look at it's basically, you know, do you trust the founder and the is a market is there good. So these are the easiest to assess of the quickest actually not the easiest to assess and then can be you know maybe three weeks so that and then on the other hand, it's a market that is not a typical home to maybe it's very technical on top of not being a market that we know of. And it's a court, maybe it's a large seat, it's a five minutes, it where we do maybe two point five or three million. So yeah, in that case, you know, it can be maybe double that time six week or eight even. I guess that is the range that we deal with. There's quite some time after the initial pitch that that you're engaging with the founders before the final decision, it sounds and you you kind of started your first answer with some documents that you were interested like the budget, the capital competition slide if it wasn't available yet. And when we first talked you mentioned a data rule is is that where you feel those documents should live and why they're and not, for instance, just over email. Yeah, no, absolutely. The journal for me is the must have and let me tell you a bit what I mean by the term. So for me, a digital, you know, you can think about it as kind of a warehouse with a showroom also next to it. Right. So most of the most is place where you store all your fundraising artifacts and then you have them ready to show and then you know using the same analogy as coming back to your question, why not via via email, of course, can be done via email. I mean, if you have a vision, the other hand, which is asking documents on by one via email can send them. And this is, you know, where you pick them from your warehouse and then just shift them. And the other alternative could be a just enter my showroom, everything is there just just you know be be my guess. And the important thing is to have everything ready to be shown immediately. That is why I think and the term has to be clean and ready, you know, to to be, you know, like a showroom. But then that is it. So you want to ship them one by one? Why not? And I guess having those forms, those documents ready is also a way to speed up your process because if they then have to combine them and compile them still. Absolutely. Absolutely. This is the so when this is it when let's say that I'm invested as a president, investor or a seed that we go for for an extra seed or a season. before we do the guide course switch out. then I, together with the father, looked that we have the digital room ready and that is, you know, to speed up the process, but also not to send some Miguel looks like to the best that, you know, that you're kind of, you're not prepared and you're just, you know, doing things all the go without any, you know, strategy or preparation. For this episode, I knew what we're going to talk about data rooms and I did some preparations to research and I could find some passionate arguments online of people saying that the data room is basically where your deal goes to die. They're saying, asking for a data room, like an investor asking for a data room is the same as you are asking for. The brochure at the car dealer, you already know you don't want the car, but you want to be lights. How would you, what is, it sounds like you really want the data room and really use it? How would you respond to this argument? Yeah, yeah. First of all, I didn't knew it before, but I think it's a good, it's a good joke. It has like the brochure of the car dealer. What I can tell you is that pretty much every deal that we ever done had a room, a data room at some point in the process. And let me come back to what I said before. If you remember the warehouse and the short room, I also remember that no process is the same. My response to that would be that the data room is not like a brochure place where the deal is going to like. It's just your preparation field where you have your own data and your own artifacts for fundraising. And yeah, it might be that some investor will ask for politeness and then just come in, look at it and never answers. So be it. You do this data room because you want to come across as very well prepared. You want to have all your items ready to be shown and this is why you do it. It's not that the digital per se enhances the fundraising skills. It's just, you know, a place to have things in order to be prepared, to be efficient than in fundraising to then give some credit to this sentence. So what I see sometimes is that investors kind of over ask data and studies and so that happens typically when you can't get an abstraction in your team with a specific deal and then you try to, you might try to then convince your teams with more and more data. But you know, that is something that usually don't happen. So if after several weeks, the investor keeps on asking data after did that and never really makes a move, then you know, maybe the deal is going to die. Yeah, unlike that, just saying it, it's also a way for you to prepare and to have an answer to all the questions that we see might have. It's not, yeah, it's not just a brochure to send people away. And you don't need to then invite them to the digital, right? That was what I was saying before you can use it as a warehouse and ship things at all. No need for the, for the master to come in the data room, if they don't want it. But also the one coming in, they don't also do damage. Therefore, I see no, I don't have you with that statement. Lear, you already mentioned a couple of the documents that you typically would like to see a budget, a cap table, a competition slide. Is there anything else founders should have prepared when they start pitching? No, absolutely. And I, you know, this is something that, you know, being ten years into this business, I have seen, you know, many, many, many, many of the digital rooms and I have now a clear idea of what there should be. So I think there are a few must-haves and a couple of, I will call them very good to have. So the must-have is obviously the pitch deck at best with some extended version. So where you have all the backup slides that you usually don't show into the first meeting. And a budget, as we discussed before, I would say 24 months, where you don't focus so much on revenue prediction, but rather on the cost and the runway. This is obviously under the assumption that this is a data room for a pre-seed or a seed company. The growth stage data room look different and we're not going to talk about them now. Then I usually, you know, for me, a must-have is a design partner as the details. So maybe some interviews that you conducted with them, what is a feedback? Alternatively, if the product is already out, a sheet with some traction data, usage data that kind of give us a bit of insights in the product with paying. Then a pipeline, you know, very basic, divided by stage, likelihood of closing a day CV. Something on the market size, maybe the calculation bottom up with some studies about the market size and then the competition analysis. So these are things our must-have. So some very good to have, you know, I'll call them HR artifacts. So for example, a NARG chart and in-depth the detail of the founders, maybe some definition or insights on the company values, what kind of work and culture policies you want to build. Do you have blueprints of companies that you admire for the culture? Do you have thoughts and diversities and some rules that you want to set in process and the Calibre of your pipeline? So maybe show me what kind of pipeline in HR you have built. Do their own indications on the kind of organization that you want to build? Product roadmap and also on that approach of the College of Product Management would be very interesting. One of the good to market strategy, description of the stage motion and the demand generation strategy. Yeah, those are, I would say, all the talkers that I would love to see in editor room. Also I would love to then say one more thing, especially at pre-seed when there's basically no product, no revenue. So everything is most in the head of the founders. It kind of helps to have some materials to look at, it kind of makes it more tangible and I think it gives a bit of confidence. Of course, as I was mentioning before, it's a young company, you can't expect to have cohort data, journal analysis and so on and so forth. It might seem a lot, but I just said that the documents per se are not very big as there is little that you can dig in, but I think it helps to have them jot down. That's a nice list and I wanted to follow up. You mentioned a seal-spied line that sounds like a B2B thing or is it also something that's relevant in a B2C environment? Well, sorry. I mean, I should have said it at the beginning. This is obviously for a B2B company. I know little to nothing about B2C, so if you have a C founder, don't listen to me. I think that's a good disclaimer, but still I think a lot of these things also count for B2C customers. But completely, I just say that I'm 10 years of B2B investing, so that's what I know, so I don't comment on the other side. Yes, that makes a lot of sense. And so what I was interested in, once a founder has uploaded all these documents, you've reviewed them, what are common mistakes you see in these documents that stop you from investing? For instance, if we think about the cap table, what are things you can see in the cap table that you're like, no, this is not a deal that we want to be part of? So a mistake in the document, so the way you phrase it, I understand, did I make a mistake compiling this document? But then how the cap table looks like, it's not like it is what it is, so it's not that you put together the document in a wrong way, so it's like a structural thing. So generally speaking, the common mistake that I see is not having one ready and not having a good, thoughtful data room where you can see that people have really taken their time and thought about the details. And you see the preparation that went through it and hopefully the preparation that also went into setting up the company and thinking about the right product. And the worst thing that I can hear is, yes, of course, let me put it together in a few days and come back to you. Then comes something that you've seen has been done in a rush. And you know, just doesn't really do impression, of course, there are some ad hoc requests that you will get that are not exactly what you have built. And for that is fine, but for basic things, you should have everything ready and be sent in a day or so. On your question, again, on the cap table, obviously, you know, a cap table that is not, that doesn't leave enough room to the founder is a problem, angels with offices with an exaggerate amount of shares is a problem. Strategic and corporate investors with larger stakes is a problem and too little is a problem. So yeah, ideally on a pre-seed, you want to have 100% in the hands of the team and a 10-15% isop pre-round. And then we go to go in a seed. Maybe you want to have, we'll have something like 20% in the hands of the investors. Then you know, the 10% isop and then the rest in the hands of the team. And then you know, as I said, it's nothing about the digital room, it's just a structural company feature. Yeah, that's a good clarification. And that's actually what I meant. Like a mistake in a data room. Yeah, that's not a big deal, I guess, if they can rectify it. But like what are things you see in these documents that stop you from investing? Like, and you mentioned a few for the cap table. Any other things that, well, for instance, in compiling their project, what do founders need to think about to not scare away investors? I am not sure that the one should compile a data room with the think of what does investor want to see. So for me, it's super important to authenticity of the team. So as I said, once I have, once you know that you should have a budget for 24 months, then I want to know what you are thinking of. And when I tell you then please show me customer interviews, you shouldn't kind of prepare the customer interviews to make them like to receive. So I think, you know, you should do the business, the way you think you should do. And then having good preparation to give the transparency for an investor to look through the business in a very short amount of time and without pay. So yeah, don't twist your company building to be liked by the BBC's, that makes sense. But having us that could scare me away when we're looking at a deal is usually reference on the founders. So if I start underworked before another scale up and then you know, I call the founder and say, yeah, you know, that wasn't a good teammate to someone that I would want to hire again. That is, you know, something that makes me think twice about doing a deal. And or, you know, maybe they had a, they were still having a startup. They were in the board, then you listen to the investor that he will hear she work before. And also again, better actions doesn't help. But I guess this is true for everything when you look for a job, when you look for, for an investment, when you're referenced on the person ours, very part of it. Yeah, indeed. That's actually, maybe we can talk about that a little bit more. So you, we already talked about this process right between three to maybe eight weeks. And that entire process is set for you to make as good of an investment decision as possible. Weird cap tables might be a reason not to invest. Weird references might be a reason not to invest. What are other things that make you lose interest in a deal? What I was referring before, topic of the founder market set is especially to pre-feed, which is the, I think is also the stage where it was mostly active at and where we are also very active at. The founder market is, let me spend a lot of time to assess or try to understand. And so that is through me, it has to be there. And what do I mean by the market? Why is this person in a unique position to build this company in this industry? I would expect someone to have particular insights on an industry that they want to change. Maybe they work before in a similar industry. Maybe they have some personal background, raise it to the industry. And maybe they have done a particular project. So this is something that I really look forward. I'm a bit weary of the founders that jump on the latest trend without having, you know, not so much experience or a reason of being in that industry. And for me the worst that can happen is the founder that two years ago was a Web 3 partner now that's turning into AI. So the authenticity and being part of the industry understanding it, that is something that for me, it's very important what makes me very excited about the deal. Because the question was, what's the scary way? So I want to also tell you what makes it excited. And so this is definitely one thing that gets me excited. And the lack of the rock is something that worries me. Yeah, like that. I think that's very important. Also something we try to spend quite some time on at EWAR with our fellows to make sure that are you the right person to solve this problem? It might be a huge problem, but why can you solve it and not someone else? I think that's absolutely. Very big question. And another thing that we spend some time on is understanding the market size. We love to invest in companies where you don't need to think about market size that much because it's almost obvious. But yet it's beginning we need to then be confident that the market is big enough to allow 100 million AR company without too much energy. Small markets is a subject that just not a fit to our business and to a VC kind of a cannot. Fidri, go we talked about data rooms. So what needs to be in them now? But what are kind of tools that you recommend people use to make such a data room? That's an interesting question. And again, remember my part of you, you know, VC early stage software product. So for me, there are many tools of choice that I recommend using it. I think that the majority of great teams look at two tools. What is notion? What is docsend? Not the place to be for many bs and for many tech startups. So it makes sense that everybody is used to that beautiful interface. Docsend is a very alternative. It's not as good looking as an ocean, but it helps to maintain more control on the documents. You get more analytics when and the cool view of what. So they can be interesting to treat some of the analytics. Also what I have usually seen that I like are long videos. You could do and should use them wisely. For example, recordings of the product roadmap or product demos. You might also have some explanations on the larger file. Maybe you have a market side. All that is a bit lengthy. You can go by search, explain it. Also, you know, long videos, but generally recordings on some customer calls. That is also very, very helpful to get it feeling out of it. And then the rest you can just use text or or specials. Something really nice that I have seen are only done a lot of times. I have seen used some co-pilot features, some generic features to look at documents in the cap table. I've actually seen it on the end twice. That was really nice. Great. Those are some really helpful tips. I think a lot of people use notion by now. So that should not come as a surprise. Well, nothing shocking, but you know. So I just did a podcast before we jumped on this podcast call with someone who works, well, who founded a deep tech company and they're basically building their own market. How do you think about market size in that sense? Because there is not really an established market yet. But do you like calculate what the market could look like in a few years? This is a very, very interesting question. I think that sense you need to start with the technology first. So is the technology really an order of mind to the better what there is out there? That is point number one. Point number two is to look at the so-called pioneers. Is there depending a bit on what is the product, but let them generalize. So is there an initial group of pioneers that are raising sand of a certain technology or product and they're willing to use it even if it's very rough and even if they need to then overcome a few problems to the newsies technology? I think these are two excellent points to start with. And then you can start of building a model of what the market could look like. But it's always very skeptical or excellent. models when you take some variables, then some numbers come out of it. So, rather, a kind of focus on is just technology really enabling something new? Is there someone that has tried this technology? And even it could very, as it's in the sea has still very problems, many problems, but still they are fan of it. So, I would start with those two things. An example of that could be back in the days, you know, 10, 12 years ago, crypto-curus, right? So, it was, she wanted to, she wanted to translate a Bitcoin 10 years ago. It was an nightmare. So, you know, you had to, you had to then have maybe physical wallet, you know, you need to go through many, many, many steps, but still people would do it. And they were actually raving about it. And there was a technology that didn't exist before. So, it was a technology that was very new. If they had a new close of raving's heads that were pioneering it, it didn't turn out in a large market. Same can be said about, about several other things, but that was, I think, I think it's a good example that and, you know, can exemplify what I mentioned. More important than then. And then you can start thinking, okay, if this can replace the X percent of the gold reserves, the word, the case of Bitcoin or X percent of transactions and case of other payment, transaction, case of other occurrences, then can be this big. But without the first two steps, you know, just calculating with some variables, I don't think it's very useful. Yeah, that makes sense. You do need some feeling for those numbers. Like, what do they mean? What is it? Is it realistic? I guess that brings us actually to the end of this podcast already. And I always wanted to end the podcast by asking if there's anything the artists or your fellows need to take away from this. What, what would your advice be? I think preparation is the key. Like pretty much everything else in your career or even your life, maybe you prepare well enough in there is not so much you have to worry about. Let's come back to our topic on the digital road and I'm raising per se. Just be prepared. It's your company. Just, you know, that will help you a lot in the process. Read. Well, with that, I wanted to thank you for appearing on a podcast, Fidriko. Thank you for having me, Leon. Anytime. It was great. And we might invite you again, because I think there's a lot of other topics that we can use for insights on. Would love to. This was Leo Borba, interviewing Fidriko Benji for the EWord podcast. Thank you for listening. [BLANK_AUDIO]