<ul><li>The Due Diligence Process: </li></ul><ul><li>A Financial Perspective </li></ul><ul><li>Troy Knauss , Fund Executiv...
<ul><li>Define the  risk  of a new investment </li></ul><ul><li>verify the plan and ask the right questions </li></ul>Due ...
<ul><li>Each deal is  unique </li></ul><ul><li>Is it an industry that you understand? </li></ul><ul><li>Is it a seed, earl...
<ul><li>When do you start? </li></ul><ul><li>Do not start due diligence unless you like the  industry , the  plan , the  t...
<ul><li>Never sign a  Non-Disclosure Agreement </li></ul><ul><li>Early in the process, the entrepreneur may ask you to sig...
<ul><li>Always go into a deal expecting to find  reasons not to invest </li></ul><ul><li>Issues with  management teams ,  ...
<ul><li>Risk:  Management Team </li></ul><ul><li>Are they  coachable ? </li></ul><ul><li>Have they done it before? </li></...
<ul><li>Risk:  Market Size </li></ul><ul><li>What are the barriers to entry? </li></ul><ul><li>Who are the competitors? </...
<ul><li>Risk:  Model </li></ul><ul><li>Does the company have a defined value proposition that customers understand? </li><...
<ul><li>Risk:  Financial </li></ul><ul><li>How much money is needed? </li></ul><ul><li>What is the structure of the deal? ...
<ul><li>Risk:  Numbers </li></ul><ul><li>Can you hit revenue sooner rather than later? How much will it cost to generate? ...
<ul><li>Risk:  Numbers </li></ul><ul><li>Did the company develop a cash flow statement? </li></ul><ul><li>What does the ca...
<ul><li>Due Diligence Process </li></ul><ul><li>Full Business Plan Review </li></ul><ul><li>Presentation from Management (...
<ul><li>Process:  Site Visit(s) </li></ul><ul><li>Meet with management team and employees to determine culture </li></ul><...
Due Diligence
<ul><li>Process:  References </li></ul><ul><li>Contact former employees, employers, and industry experts </li></ul><ul><li...
<ul><li>Process:  Competitive Analysis </li></ul><ul><li>What market share is required to hit the plan? </li></ul><ul><li>...
<ul><li>Process:  Financials </li></ul><ul><li>What is the sales pipeline? </li></ul><ul><li>How leveraged is the company?...
<ul><li>Process:  Valuation </li></ul><ul><li>Do not use book value, market value or income value to determine early-stage...
Due Diligence : A Financial Perspective Today (Series A) Series B Series C Later Stage Valuation Valuations not growing si...
<ul><li>Typical Valuation Expectations </li></ul><ul><li>Series A: $500,000 to $1.5MM </li></ul><ul><li>Pre-money valuatio...
Due Diligence : A Financial Perspective Investment Sought Valuation At Exit Multiple $1,000,000 Pre-money  Valuation $14 m...
Due Diligence : A Financial Perspective 2X 15% 4X 30% 5X 40% 8X 50% 10X 60% 5-Year Returns (Multiple) Internal Rate of Ret...
Distribution of Returns by Venture Investment Average Returns
High = 1 or 2 times per  month Low = 1 or 2 times per  year   High 3.7X (4.0 years) Low 1.3X (3.6 years) Impact of Partici...
<ul><li>What can help increase valuations </li></ul><ul><li>Experienced management team ( first time entrepreneurs will ex...
Venture Capitalist Valuation Method $2,000,000 Pre-Money Valuation 33%  ($10MM / $30MM) % Equity Required $10,000,000  (Fu...
<ul><li>Process:  Valuation </li></ul><ul><li>In today’s financial environment, investors can dictate valuation </li></ul>...
<ul><li>Term Sheet </li></ul><ul><li>Ask for a Board position </li></ul><ul><li>Ask entrepreneur to pay your legal fees an...
Typical Deal Terms Convertible Notes vs. Preferred Stock Purchase Status of Company (C-Corp preferred) | Issues with LLCs ...
<ul><li>Other Information </li></ul><ul><li>How long does a typical due diligence take? </li></ul><ul><li>What are the odd...
Contact Information : Troy Knauss Piedmont Angel Network [email_address] (336) 235-0941
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Knauss Financial Dd

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Knauss Financial Dd

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  • Knauss Financial Dd

    1. 1. <ul><li>The Due Diligence Process: </li></ul><ul><li>A Financial Perspective </li></ul><ul><li>Troy Knauss , Fund Executive </li></ul><ul><li>Piedmont Angel Network </li></ul><ul><li>Adjunct Professor, Wake Forest Univeristy </li></ul><ul><li>[email_address] </li></ul>Presentation                                                 
    2. 2. <ul><li>Define the risk of a new investment </li></ul><ul><li>verify the plan and ask the right questions </li></ul>Due Diligence : A Financial Perspective
    3. 3. <ul><li>Each deal is unique </li></ul><ul><li>Is it an industry that you understand? </li></ul><ul><li>Is it a seed, early stage or later stage deal? </li></ul><ul><li>How much money is required to hit major milestones and inflection points? </li></ul><ul><li>What is your individual risk profile? </li></ul><ul><li>Who are your syndication partners? </li></ul>Due Diligence : A Financial Perspective
    4. 4. <ul><li>When do you start? </li></ul><ul><li>Do not start due diligence unless you like the industry , the plan , the team , the deal , and believe you can add value </li></ul><ul><li>Due diligence is expensive and takes a lot of time </li></ul>Due Diligence : A Financial Perspective
    5. 5. <ul><li>Never sign a Non-Disclosure Agreement </li></ul><ul><li>Early in the process, the entrepreneur may ask you to sign an NDA </li></ul><ul><li>Many investors will not sign </li></ul><ul><ul><ul><li>See a lot of similar deals </li></ul></ul></ul><ul><ul><ul><li>Not interested in stealing ideas </li></ul></ul></ul><ul><ul><ul><li>Long-term interest in reputation </li></ul></ul></ul>Due Diligence : A Financial Perspective
    6. 6. <ul><li>Always go into a deal expecting to find reasons not to invest </li></ul><ul><li>Issues with management teams , market size , competition , intellectual property (IP), stage of development , and revenue assumptions (financials) </li></ul>Due Diligence : A Financial Perspective
    7. 7. <ul><li>Risk: Management Team </li></ul><ul><li>Are they coachable ? </li></ul><ul><li>Have they done it before? </li></ul><ul><li>What is their experience? </li></ul><ul><li>Do they have knowledge in a specific industry? </li></ul>Due Diligence : A Financial Perspective
    8. 8. <ul><li>Risk: Market Size </li></ul><ul><li>What are the barriers to entry? </li></ul><ul><li>Who are the competitors? </li></ul><ul><li>What is the growth rate? </li></ul><ul><li>What are the assumptions of the revenue model? </li></ul><ul><li>What do customers say? Is this a must-have? </li></ul>Due Diligence : A Financial Perspective
    9. 9. <ul><li>Risk: Model </li></ul><ul><li>Does the company have a defined value proposition that customers understand? </li></ul><ul><li>What is the long-term growth strategy and how does it influence the revenue model? </li></ul><ul><li>Is there differentiation? </li></ul>Due Diligence : A Financial Perspective
    10. 10. <ul><li>Risk: Financial </li></ul><ul><li>How much money is needed? </li></ul><ul><li>What is the structure of the deal? </li></ul><ul><li>Can the deal be negotiated? </li></ul><ul><li>What is the valuation? Do you have comparables to review? </li></ul><ul><li>What is the exit strategy? </li></ul>Due Diligence : A Financial Perspective
    11. 11. <ul><li>Risk: Numbers </li></ul><ul><li>Can you hit revenue sooner rather than later? How much will it cost to generate? </li></ul><ul><li>How much salary is the team taking as a percentage of the fund raise? </li></ul><ul><li>Is the company allocating enough money for marketing dollars? </li></ul>Due Diligence : A Financial Perspective
    12. 12. <ul><li>Risk: Numbers </li></ul><ul><li>Did the company develop a cash flow statement? </li></ul><ul><li>What does the capitalization table look like? </li></ul><ul><li>Does the company have any debts, liabilities, issues with uncollected A/R? </li></ul>Due Diligence : A Financial Perspective
    13. 13. <ul><li>Due Diligence Process </li></ul><ul><li>Full Business Plan Review </li></ul><ul><li>Presentation from Management (Maximum 15 minutes) </li></ul><ul><li>Site Visit(s) </li></ul><ul><li>Receive Due Diligence Checklist </li></ul><ul><li>Review References </li></ul><ul><li>Conduct Competitive and Financial Analysis </li></ul><ul><li>Finalize the Deal Terms </li></ul>Due Diligence : A Financial Perspective
    14. 14. <ul><li>Process: Site Visit(s) </li></ul><ul><li>Meet with management team and employees to determine culture </li></ul><ul><li>Review the organizational chart </li></ul><ul><li>Determine if this group is coachable </li></ul><ul><li>Is the company spending money on areas/people not needed at this stage? </li></ul>Due Diligence : A Financial Perspective
    15. 15. Due Diligence
    16. 16. <ul><li>Process: References </li></ul><ul><li>Contact former employees, employers, and industry experts </li></ul><ul><li>Conduct background checks on all key employees </li></ul><ul><li>Be prepared to ask for key man insurance on certain employees </li></ul><ul><li>Interview Advisors and Directors </li></ul><ul><li>Talk to current investors, lawyers and accountants </li></ul>Due Diligence : A Financial Perspective
    17. 17. <ul><li>Process: Competitive Analysis </li></ul><ul><li>What market share is required to hit the plan? </li></ul><ul><li>Use game theory to predict competitive response to business plan. Can you compete if the response is to lower prices? </li></ul><ul><li>Why would a customer buy from you? Differentiation? Price? </li></ul>Due Diligence : A Financial Perspective
    18. 18. <ul><li>Process: Financials </li></ul><ul><li>What is the sales pipeline? </li></ul><ul><li>How leveraged is the company? Can the company get non-dilutive funding from banks? </li></ul><ul><li>How has the company performed against previous plans? </li></ul>Due Diligence : A Financial Perspective
    19. 19. <ul><li>Process: Valuation </li></ul><ul><li>Do not use book value, market value or income value to determine early-stage valuations? </li></ul><ul><li>Early-stage companies: </li></ul><ul><ul><ul><li>No track record </li></ul></ul></ul><ul><ul><ul><li>Low or negative profitability and cash flow </li></ul></ul></ul><ul><ul><ul><li>Significant risk </li></ul></ul></ul>Due Diligence : A Financial Perspective
    20. 20. Due Diligence : A Financial Perspective Today (Series A) Series B Series C Later Stage Valuation Valuations not growing significantly between Series A and Series C rounds VC money moving to later stage
    21. 21. <ul><li>Typical Valuation Expectations </li></ul><ul><li>Series A: $500,000 to $1.5MM </li></ul><ul><li>Pre-money valuation: Under $3MM </li></ul><ul><li>Equity: 10% - 40% </li></ul><ul><li>Expected Returns: 10X – 30X </li></ul><ul><li>No specific calculation (gut feel) </li></ul>Due Diligence : A Financial Perspective
    22. 22. Due Diligence : A Financial Perspective Investment Sought Valuation At Exit Multiple $1,000,000 Pre-money Valuation $14 million $6 million $45 million 2X 3X $1,000,000 $2 million $30 million 10X $1,000,000 $2 million
    23. 23. Due Diligence : A Financial Perspective 2X 15% 4X 30% 5X 40% 8X 50% 10X 60% 5-Year Returns (Multiple) Internal Rate of Return (IRR)
    24. 24. Distribution of Returns by Venture Investment Average Returns
    25. 25. High = 1 or 2 times per month Low = 1 or 2 times per year High 3.7X (4.0 years) Low 1.3X (3.6 years) Impact of Participation Mentoring, Board, Financial Monitoring Returns with Monitoring
    26. 26. <ul><li>What can help increase valuations </li></ul><ul><li>Experienced management team ( first time entrepreneurs will exit company with 8%, second time, 20%) </li></ul><ul><li>Strong technology, large opportunity, and size of round to hit milestones </li></ul>Due Diligence : A Financial Perspective
    27. 27. Venture Capitalist Valuation Method $2,000,000 Pre-Money Valuation 33% ($10MM / $30MM) % Equity Required $10,000,000 (Funds Required x 10) Required Cash Return 60% IRR (Multiple: 10X) Required IRR $30,000,000 Company Value 15X P/E Industry Plan expects 10% ($2MM) Net Profit (5 th Year) $20,000,000 Revenue (5 th Year) Year 5 Exit Year (Expected) $1,000,000 Funds Required
    28. 28. <ul><li>Process: Valuation </li></ul><ul><li>In today’s financial environment, investors can dictate valuation </li></ul><ul><li>Historical valuations are no longer applicable </li></ul><ul><li>Important to negotiate valuation in good-faith… do not want to invest in a negative entrepreneur </li></ul>Due Diligence : A Financial Perspective
    29. 29. <ul><li>Term Sheet </li></ul><ul><li>Ask for a Board position </li></ul><ul><li>Ask entrepreneur to pay your legal fees and to prepare documents in accordance to your term sheet </li></ul><ul><li>Do not overpay … think about future rounds (2/3 rd rule) </li></ul>Due Diligence : A Financial Perspective
    30. 30. Typical Deal Terms Convertible Notes vs. Preferred Stock Purchase Status of Company (C-Corp preferred) | Issues with LLCs (K1s) Dividends: Not Mandatory; Prefer no dividends Liquidation Preference: Minimum 1x Protective Provisions: Majority of Preferred Stock Holders must approve changes to ByLaws, issuance of new shares, changes to the number of Board members, redemption of shares, creation of debt, etc. Reporting Requirements: Monitoring reports that include performance to budget, new milestones, new projections, and cap. tables Repurchasing Rights: Not in all cases but more and more deals are requiring the founder to vest his/her shares
    31. 31. <ul><li>Other Information </li></ul><ul><li>How long does a typical due diligence take? </li></ul><ul><li>What are the odds of making an investment? </li></ul>Due Diligence : A Financial Perspective
    32. 32. Contact Information : Troy Knauss Piedmont Angel Network [email_address] (336) 235-0941

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