Raising Capital from Volition: An Inside Look

An Inside Look at Volition Capital’s Due Diligence Process

Many of our founders have principally bootstrapped their business and often don’t have significant experience raising outside capital. This unfamiliarity with the process is common and, in many ways, shows that they have built their business on the backs of customer revenue rather than outside venture capital dollars—a testament to their operational capability and product-market fit.

At Volition Capital, we value transparency and know that the due diligence process can be intimidating for first-time fundraisers. Our goal during the diligence period is to get to know you and deeply understand the inner workings of your business. We are thorough and pride ourselves on dotting our i’s and crossing our t’s. We have found that when we do so we are able to offer our founders more than a monetary investment, but a strategic partner who is ready to dive in from day one. A typical due diligence process at Volition Capital goes like this:

Getting to know you

First and foremost, we are in the business of investing in people. There are five things we care most about when we make an investment—in no particular order we are paying attention to product, market, management, management, and management. Corny? Maybe, but this philosophy has brought us consistent, measurable success. Before diving into any data, we set out to connect with founders on a personal level. We want to know your origin stories and ambitions, what makes you tick, and your unique passions. Whether this process is fast-tracked—driven by the rapid pace of today’s market—or cultivated over several years, our intent is always the same—back founders we believe in and build meaningful, long-lasting relationships with them.

Getting to know your business

As we get to know you better, we will also ask a lot of questions about your business in order to learn as much as we can about your role within your vertical. To help us paint a full picture, we’ll send over a request for data that will be used by our team to get more granular in our analysis.

We know that founders are focused on running their business and pulling together data can seem cumbersome, so it’s our goal to make this pre-term sheet process as easy as possible. Through working with our own portfolio companies, we understand how time-consuming a capital raise can be on management teams if investors aren’t efficient and purposeful in their requests.

We are often asked what kind of data is requested at this stage. It varies from business to business, but for a typical internet and consumer company, we can do most of the initial screen based on 3 blocks of data:

#1: Detailed historical monthly financials and forward-looking projections

• In our evaluation, it’s helpful for us to understand revenue trends, gross margins, and operating expenses broken by category for S&M, G&A, and R&D. It’s helpful to see at least two years of historical data to provide a more holistic view of historical trends over time. Not every company that goes through our due diligence process has an operating model of forward-looking projections and that’s okay. Often, we work together with founders during exclusivity to help build that model. Forward-looking projections help us better understand your philosophy on things like balancing growth and burn. If you haven’t built a detailed model to illustrate that yet, we will talk through some of your projections and can help you build a financial model down the road.

#2 Revenue by customer by month

• Understanding revenue by customer by month provides us with the necessary data to run customer cohorts and better understand the lifetime value of your customers. Though it may seem daunting to founders who haven’t run this type of analysis prior to diligence, it is our goal to make this request manageable. For instance, if you can provide anonymized unique customer transactions over time, we will take that raw data and create the revenue by customer by month file for you. For founders who haven’t run this analysis, we can also share back what we’ve learned.
• We’ve helped our portfolio companies zero in on things like customer service and additional product launches to grow customer lifetime value (LTV). We like to see where you’ve executed on this in the past and guide you through additional opportunities by leveraging best practices across our portfolio companies.

#3 Customer acquisition cost (CAC) by channel over time

• CAC by channel over time is helpful for us to better understand how efficiently your company has been acquiring customers by channel. At Volition, we think about customer acquisition cost in two buckets—paid and blended. On the paid side, it’s useful to see this data by paid channel (like Facebook, Snapchat, Google, etc.) to see which have been successful and which are less economic. Blended CAC takes into account customers acquired organically, while also incorporating marketing spend that may not be directly attributable. We’ve worked with our portfolio companies like Chewy to diversify acquisition channels and drive efficiency and are excited to use our learnings to help founders strategize.

So, how long does it take?

The diligence process varies based on a company’s unique needs, but on average the process lasts 6-8 weeks. We begin with two weeks of business due diligence, pre-term sheet, followed by 4-6 weeks of third-party due diligence during exclusivity. Business due diligence includes meetings with management, analyzing company data, and internal market research. During the first two weeks, we will also discuss what a potential deal could look like to ensure we are aligned with management. If a term sheet is signed at the end of that period, we will continue to immerse ourselves in the business to understand its place in the market. During the 4-6 week period, it is not unusual for Volition to leverage third parties to assist with accounting, technical and legal due diligence.

The bottom line

For many organizations, raising capital is essential, but we understand that raising capital can take attention away from the day-to-day operations of your business. It’s our goal to take as much of the burden off of management as possible by being purposeful in our requests and efficient in our analysis. We’ve also heard from our founders that sharing this analysis back with them has been beneficial. At Volition Capital, we want to help founders realize their mission while building a meaningful, long-term partnership in the process.