Continuous Data Room

Even as private companies face a growing number of risks, the pace of the private investment market continues to accelerate. In this environment, a fundraising event or exit can happen at any moment, either because a strategic opportunity presents itself or there is a need for a defensive move against competitors.

That puts a premium on preparedness. Specifically, that means having your data and metrics in order so they can be shared at a moment’s notice, allowing potential investors or other stakeholders to make rapid decisions.

Unfortunately, in the rush to scale, many startups neglect their internal data. Forget the talk you hear about this or that startup being “data-driven.” Performing “hard due diligence” (i.e. financial + legal) is at the heart of what we do at d’Ornano + Co. And what we find at most scaleups, in terms of data when we first enter the picture, is simply insufficient. Too often, startups are faced with an audit as part of an offer, and they need several weeks just to get their books in shape for such an inspection.

To address this, we’re introducing a new product called Continuous Data Room. This platform delivers a mix of financial and operational metrics in real time and checks consistency of key legal matters (i.e. cap table, customer contracts, IP/IT rights). You can have data that is specific to your company and to your vertical that will ensure visibility and understanding of your business model. This puts critical data at the fingertips of founders who can then simply push the send button when such data is requested.

The goal here is twofold. Expectations for such rapid responses have become the norm. But just as critical: These real-time performance metrics are the bedrock for continually measuring progress even when an offer is not pending.

As the funding picture evolves, we predict that only the very best startups will continue to raise those big rounds. They won’t be judged on potential, but on performance. It’s essential that companies not just be the best but also deliver the key data that backs up that claim.

We can help with both.

The context

Venture capital investments remain at a fevered pitch. According to NVCA/Pitchbook Monitor, VC funds closed a record $70 billion in Q1 2022. But that embarrassment of riches didn’t trickle down into the pockets of entrepreneurs. And funding is not homogeneous. Per Crunchbase, global new unicorn count by quarter fell in Q1 22 vs. Q4 21 with 129 new unicorns vs. 146. Global late-stage and Growth Investment also fell through Q1 22 ($98B invested vs. $110.9B in Q4 21.

We’ve rapidly, perhaps brutally, transitioned from a hyper frothy VC environment to a world where many deals are not getting done,” wrote Matt Turck, a partner at the VC firm FirstMark, in a blog post at the end of April.

The reasons for this equity penny pinching are obvious: The growing nervousness around supply chains, inflation, stock markets, the lingering pandemic, and the Ukrainian War.

And yet, investors can’t sit on this money indefinitely. Instead, they are going to raise the bar and become even more selective. Only the best startups with the right valuations are going to clear a rising investment bar.

The good news on this side of the Atlantic is that European startups remain hot. So far, the slump U.S. venture investing has not spread to Europe where startups raised $26.8 billion in Q1 2022 per CB Insights’ State of Venture report. Indeed, from our conversations with US investors, they plan to accelerate their presence in European rounds, either as lead or as follow-on investors. But their standards are tough, and their attention spans are short. If they come knocking and your startup is not ready to answer their questions, they’ll move right along.

That’s not something you can let happen. Founders face an unforgiving cycle. An ambitious start-up needs financing constantly to grow at scale. But they also must religiously deliver growth targets to persuade investors to cut those next checks.

One stumble outside that cycle can be dangerous. Getting the right financing at the right time is critical. This is even more true today than it was a couple of years ago as the competition gets more intense and as the competition is international.

That’s necessary to keep the internal growth engine humming. But meeting scale up targets also means increasingly embracing external growth options such as acquisitions.

Keeping that growth wheel spinning is paramount for companies that want to be solid candidates for an IPO. That includes demonstrating growth at scale, including ARR greater than $100 million and 40% growth over multiple years to reach that milestone.

The key takeaway is that the founder must effectively manage these fundraising moments. We can’t tell you when these will occur. Those US investors and other non-traditional asset managers are only adding to the unpredictability.

But we can be sure your startup is in a perpetual state of readiness to respond.

The Right Metrics and Data at The Right Time

Being data ready starts with identifying the right financial and operational metrics that drive the repeatable growth (and path to profitability) which attracts those coveted investors.

Let’s assume you’re identified a Total Addressable Market that’s sufficiently large. To convince investors you can get a sizable slice of this TAM, you must demonstrate operational excellence through 2 key pillars: Growth and Best-in-class Execution.

Here’s where those metrics come into play, our bread-and-butter at d’Ornano + Co.

Core metrics come in 2 flavors. There are those that are common to all tech verticals and those that are specific to your business. Both are key.

Let’s take the example of a SaaS company. Whether it operates in HRTech or MarketingTech, there are key metrics such as ARR, Gross margin, or NRR that would apply to any SaaS company. As such, they need to be tracked in ways that respond to industry definitions. These definitions are set by VCs and companies themselves, and yet they can be opaque. Unlike for accounting metrics, no industry association has issued standards and no government regulators have adopted universal guidelines.

So, we’ve developed a “golden dictionary” of those definitions based on the intelligence we’ve gleaned from due diligence on behalf of investors and scaleups. We can see, for instance, that there is effectively an industry-wide definition of gross margin for SaaS businesses. And we can also see that European scale-ups are never systematic in applying it.

The result is lost time as US investors ask us to reperform calculations to get it right and ensure comparability with other relevant businesses of that type at the same development stage. We help fix this in anticipation.

Still, that can be relatively straightforward compared to the challenge of metrics that apply specifically to a given company’s business model. These could be things like tracking the right customer acquisition cost per segment or distorted definitions of a particular metric applied by a company on a given vertical.

For example, consider this mouthful from Warby Parker which tracks a Four-Wall Margin: “A measure that applies to a subset of our retail stores that have been open for 12 months or more and were also open each month during the measurement period (other than for temporary closures in the ordinary course of business, such as for inclement weather and ordinary course repairs). For this subset of retail stores, Four-Wall Margin is an average of each retail store’s sales less cost of sales including occupancy, store labor and store operating expenses, divided by average sales per retail store.”

That’s about as specific as you can get, and the product of deep reflection by the company on how to communicate performance to investors. These metrics need to be custom built and tracked for scale-ups as they allow investors to understand whether the company is on track for efficient growth. For IPO-level scale-ups even more vital. There is a lot of work for many European scale-ups in this area.

Let’s not forget legal. Having an up to date cap table and a risk-free contractual framework is as fundamental as having these right operational and financial metrics.

The Importance of Continuous Tracking

Let’s be clear about what we mean when we talk about “Continuous Data”.

There are two types of quantitative data: discrete and continuous. Discrete data is something you can count. A company has 400 employees or 3 offices. Continuous data is measurable and therefore runs along a scale or continuum, like time or temperature.

For our purposes, Financial and Operational data must be tracked as Continuous Data. This allows us to measure both Growth and the quality of Execution. And as the term suggests, the most ambitious startups must do this continuously rather than capturing the occasional snapshot when someone runs a report.

There is potentially an internal audience for these metrics and an external one.

By establishing a Continuous Data process, the best startups can provide regular updates to the board, current investors, and other stakeholders. In addition, a Continuous Data Room can help benchmark your data to assess whether — and why — your peers are doing better.

Having audited Contentsquare, we saw first-hand CEO Jonathan Cherki’s obsession for metrics and how they feed constantly into internal management decisions that proved pivotal in the company’s journey.

Looking externally, that Continuous Data takes on greater weight with the arrival of non-traditional investors in the Tech scene. Private Equity firms, for instance, have well-grounded analytics cultures. They expect clear-cut answers to their questions about the target company’s path to growth and to profitability. Financial and operational metrics are the right way to answer them.

A consistent tracking of the right metrics also serves the traditional VC financing approach because financing rounds no longer follow clear timing rules. This can be explained in part by the growing emphasis on external growth. Imagine a company finds an acquisition target, strategic in the execution of its growth plan, but which requires a fundraising round to get the right amount of financing. Here comes a due diligence request. A company not prepared could miss this funding and acquisition opportunity, a mistake that could be compounded if a competitor swoops in.

If a founder waits for a due-diligence process to identify the actual metrics and the method for tracking them, they’re probably sunk. We are often called into such situations to bail someone out, and we do our best to right the ship. But even when we deliver data to satisfy the due diligence, the founding team has still missed the operational benefits that would have come from Continuous Data.

By establishing a Continuous Data process, founders can instantly respond to those due diligence requests, something that creates a strong and positive response from prospective investors. At d’Ornano + Co.., the best scale-ups with which we have worked know their metrics and have enough data history to explain variations, both ups and downs. They use this insight to make regular course corrections, big and small, to stay on target toward their goals and KPIs.

Conclusion

The start-up environment has fundamentally changed in recent years. Beyond fueling digitalization across a wide range of sectors, the pandemic has also accelerated competition and changed the funding environment with new actors and new timelines.

Through this upheaval, one lesson has become clear to us: Start-ups who want to thrive must be prepared. That means prepared to execute their plan and prepared to seize opportunities that will help them accelerate or defend themselves.

This preparation starts by following the right financial and operating metrics, both generic and tailored ones in the form of Continuous Data, and by being compliant legal wise. Amid growing uncertainty, the right metrics and data can serve as catalysts to the growth the very best startups need to realize their potential.

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Raphaëlle d'Ornano

Managing Partner + Founder D’Ornano + Co. A pioneer in Hybrid Growth Diligence. Paris - NY. Young Leader French American Foundation 2022. Marathon runner.