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Venture capital due diligence
- 1. Venture Capital Due Diligence 1/31/2018 Prof. Rupesh Shah 1
- 2. INVESTABLE UNINVESTABLE 1/31/2018 Prof. Rupesh Shah 2
- 3. low Diligence High Diligence 65% 25% 45% 30% 5% 10% 5% 1% <1% 10% <IX IX–5X 5X–10X 10X-30X >30X Exit Multiple PercentageOfDeath 1/31/2018 Prof. Rupesh Shah 3
- 4. High Due Diligence Low Due Diligence 1/31/2018 Prof. Rupesh Shah 4
- 5. 100 – 200 Hours of Due Diligence 1/31/2018 Prof. Rupesh Shah 5
- 6. Varying Sector Expertise Analytical + Intuitive 1/31/2018 Prof. Rupesh Shah 6
- 7. Key Ratios Valuations Research Technology Patents Team Qualifications 1/31/2018 Prof. Rupesh Shah 7
- 8. Overall feel of the day Performance under adverse condition Honesty 1/31/2018 Prof. Rupesh Shah 8
- 9. Due Diligence 1/31/2018 Prof. Rupesh Shah 9
- 10. Formal Due Diligence Process 1. Document Submission 2. Identify Key Risks 3. Produce Due Diligence Report 4. Negotiate a Term sheet 1/31/2018 Prof. Rupesh Shah 10
- 11. Tips 1.Have an Organized Due Diligence Folder 2.Respond Promptly to Inquires 3.Know what to Expect from the Due Diligence 4.Begin Negotiations Early 5.Set a Reasonable close date 1/31/2018 Prof. Rupesh Shah 11
- 12. Due Diligence Investors Entrepreneur 1/31/2018 Prof. Rupesh Shah 12
- 13. Why do due diligence? • VC is a game of risk • 3 out of 4 startups fail • Everything is based on assumption. In due diligence we make sure our assumptions are sound. 1/31/2018 Prof. Rupesh Shah 13
- 14. Three Stages of Due Diligence • Stage 1: Screening Due Diligence • Stage 2: Business Due Diligence • Stage 2: Legal Due Diligence 1/31/2018 Prof. Rupesh Shah 14
- 15. STAGE 1: SCREENING Three Stages of Due Diligence 1/31/2018 Prof. Rupesh Shah 15
- 16. Screening • Companies get screened out for two reasons The opportunity does not fit the fund's mandate or criteria Business stage (idea stage , early stage , etc. ) Geographic region Size of deal Industry sector Some funds will only review opportunities that have come via a referral from a trusted source 1/31/2018 Prof. Rupesh Shah 16
- 17. SATGE 2: BUSINESS Three Stages of Due Diligence 1/31/2018 Prof. Rupesh Shah 17
- 18. Founders and Team • Personality – Capable of sustained intense effort – Able to evaluate and react to risk well – Articulate in disusing venture – Attends to details – Compatible personality • Experience – Thoroughly familiar with market – Demonstrated past leadership – Track record relevant to venture – Referred through trustworthy source 1/31/2018 Prof. Rupesh Shah 18
- 19. Business Model • Mentally walk through the business model generation framework – Key Partners – Key activities – Key resources – Value proposition – Customer relationship – Channels – Customers Segments – Cost Structure – Revenue steams 1/31/2018 Prof. Rupesh Shah 19
- 20. Go to Market • Can the company articulate their value proposition simply? • Can the team explain how they will got to market? • Do they have a good understanding of the competition? 1/31/2018 Prof. Rupesh Shah 20
- 21. The Angle • What insight has the founding team made that the market hasn’t yet realized? 1/31/2018 Prof. Rupesh Shah 21
- 22. Market Size • Do your own research on the market size. Are their assumptions sound? • What kinds of moves are incumbents making? • How might a startup disrupt the market? 1/31/2018 Prof. Rupesh Shah 22
- 23. Team Reference • Look up people on LinkedIn who know the founders 1/31/2018 Prof. Rupesh Shah 23
- 24. Industry Reference • Call a few people who knows the industry well 1/31/2018 Prof. Rupesh Shah 24
- 25. Customers/ Users • How many users/ customers do they have? • How does that compare to other startups that operate in the same / similar space? 1/31/2018 Prof. Rupesh Shah 25
- 26. Product Roadmap • Where is the product/ service going? • Does the team have a competitive / ambitious roadmap? 1/31/2018 Prof. Rupesh Shah 26
- 27. Financing Plan • Are the assumptions made in the financial projections sound? • Foe seed stage: – Are they raising a reasonable amount to get through 3 month? • For growth stage: – Are they raising a reasonable amount to get them through 12-13 months? 1/31/2018 Prof. Rupesh Shah 27
- 28. STAGE 3: LEGAL Three Stages of Due Diligence 1/31/2018 Prof. Rupesh Shah 28
- 29. Legal Diligence • How the lawyer look through everything. • “I’m interested in learning how well formed the company is, if there are skeleton in the closet like fired co-founders or large debts or consultants who are owned shares or pending lawsuits. I’m also curious to see how a founder negotiates (though this comes through after the term sheet has been issued)”. 1/31/2018 Prof. Rupesh Shah 29
- 30. 1/31/2018 Prof. Rupesh Shah 30
Editor's Notes
- Due diligence is all about looking for opportunities , providing mentorship, as well as keeping eye on the risk. They look at deals which seems promising and sometimes we find proms that make the money investable and other time you may find big opportunities that the founders may have not noticed making the investment opportunity even better.
- This chart shows there would just be a median of 40hrs spend the likely head of receiving of less than 1$ for each $ invested goes down and the likely head of receving exit multiples attended 30 times or more increases dramatically .
- Overall investors are performing greater manner of due diligence receive 5-10 times greater returns than lower due diligence counterparts.
- In the production of due diligence report a venture capitalist will conduct 100-200 hours of due diligence split between a team of analyst and angel investors.
- An advantage of investing in angel groups is that they have many members vaying sector expertise so there is a wisdom of crowds effect with committee engagement . Sometimes people mistake due diligence process as mostly mechanical and financial exercise . But there is an equal amount of intuitive work which should be done for due diligence as well. & in fact analytical plan & intuitive work should be balanced throught out the process.
- On the anayltical side we look at the
- On the intuitive side we look at the
- Due diligence starts from the very first contact that the potential investor has with the company all the way past funding. Even though a company may not ready to pitch initial meetings can tell a investor a lot about how founder approaches problems ,sets goals and responds to criticism This first impression can also guide investors choice what they want to dig into during the formal due diligence process.
- After a venture capitalist has determined that company has sufficient investor interest they move into formal due diligence process For the due diligence process to begin a company must submit a minimum of 18 due diligence document Entrepreneur are encourage to submit more documents as a house streamline the process further down the road. 2. 2nd phase of the process investors deal with the leadership team to get their pressing questions answered . This step is essential to adapt identify the key risk that the company must mitigate in order to be successful In the next phase of the process the leading investor meets with venture capital analytics team . The venture capital analytics team is completely involved in tier based and is based on industry professionals including attorneys, CFA’s, MBA’s & startup experts. The investor help to focus the team on the key risk & key strengths of the company .Starting with this meeting the team will produce full fledged due diligence report in certain days. This report will help to syndicate with outside angel groups and individuals Once the due diligence report is being completed the leading investor and venture capital executive team will negotiate a term sheet and their commitments Is it important to note that a company can follow at any point in this process and consisting communication with the investors key to help them round close and is essential to raising future rounds.
- Speed at which a company goes through this process is directly correlated to how quickly their round closes Here are few tips ensuring that the round goes smoothly.
- Due diligence is a process that is beneficial to both the investor and the entrepreneurs Speed is extremely important . Make sure that you have your dots and rows to make sure your process runs smoothly If the things runs smoothly this process can take as much as 4 hours for executive team member