A Due Diligence Study


Published on

A case study on due diligence.

Published in: Economy & Finance
1 Like
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

A Due Diligence Study

  1. 1. A Due Diligence Case Study The following presentation was captured from fictitious member notes of a “diligence check”, often referred to as “due diligence”, on what could best be described as a well known but fictitious enterprise (company). The due diligence team researched and reported on the enterprise’s market opportunity, product, intellectual property, competition, financials and management, with a recommendation for investment for the group. This case study is offered as a teaching tool that describes the minimal themes of a due diligence check (keywords bold and italicized ) and will hopefully prepare perspective companies for such diligence checks in the future. Investor Presentation Guidelines ©2010 Tech Coast Angels
  2. 2. Executive Summary This enterprise has over 300M potential subscribers that generate revenue in excess of $2T (yes, trillion dollars!) per year. They have a unique product that so far has been unmatched by the competition. There are barriers to entry to competition and the intellectual property of this enterprise in terms of human and technical capital is enormous. The future should be extremely bright for this enterprise. That said, management’s spending is outrageous. Even with $2T in yearly revenue run rate, management is running a deficit, taking on huge debt and delivering less quality service to subscribers. Many independent projections show this financial path to be unsustainable. We invest in teams, and after many long meetings with this team, we can’t get them to recognize their problems and address them. We find this team to be un-coachable and therefore recommend not investing in this enterprise in spite of all its positive aspects. Details follow… © 2010 Tech Coast Angels 2
  3. 3. Market Opportunity * 300M subscribers with many more expressing interest to have access to services * Expanding subscriber base , both organically and additionally via new subscribers moving into geography * Grouping of subscribers into 50 semi-autonomous geographical regions, all forced to use services (a moat or fence) * Large resources available from geographical regions: human, natural and intellectual * Region, as a whole, has goods and services exported all over the world In Short: Large market opportunity that fences out competition with growing subscriber base for services. © 2010 Tech Coast Angels 3
  4. 4. Product * Product is “services” paid by subscription fee * Services include safety services, infrastructure, health, education and other common services, some required, some seen as entitled by subscribers. * Product fulfills basic wishes of subscribers but there are many potential areas of improvement; product seen as unique In Short: Product is a service-based business that satisfies basic subscriber needs but has many potential areas for future improvement. © 2010 Tech Coast Angels 4
  5. 5. Intellectual Property * Large base of human and technical IP (intellectual property) * Subscriber of service being the single largest IP component: extreme “network effect” * Research and development rarely matched in breadth and depth * Educational/training: although not perfect, supplies ongoing potential increase in subscriber base (and fees) In Short: Network effect among subscribers and large human and technical IP; probably unmatched by competition. © 2010 Tech Coast Angels 5
  6. 6. Competition * Competition is abundant but switching costs are high due to geographic boundaries * Competitive services are collectively worse with some individual services more enhanced * Competitive subscription fees are clearly inferior: generally much higher fees for equivalent, and in a lot of cases, more inferior service In Short: Competition is numerous yet high switching costs due to geographic boundaries essentially “fence out” competition. © 2010 Tech Coast Angels 6
  7. 7. Financials * Good news: Graduated subscriber fee - subscribers generally pay more for services based on income; over $2T yearly revenue! * Bad news: management spends over $2T and may double expenditures in coming years * Bad news, II: in addition to deficit spending, management is taking out loans with interest that will in the long term be unsustainable given financial model * Bad news, III: management is taking loans from the competition!!!! In Short: Given a rational expenditure plan, management could be turning profit and paying down existing debt. © 2010 Tech Coast Angels 7
  8. 8. Management * Management is in turmoil: two camps, both of which won’t address spending issues; just finger pointing * Gridlock: no real formal plan for future, no rational discussion or coordination for controlling spending in conjunction with subscriber fee increases * Due diligence team, after several meetings, could not get management to a) admit there was problem or b) come together with a coordinated plan to fix problems * Due diligence team feels this management team is un-coachable, they will not take reasonable input and address, or even admit to, obvious problems. In Short: Fractured, un-coachable management. Poor or no planning, no product or financial future roadmap. © 2010 Tech Coast Angels 8
  9. 9. Summary * Unique product * Large growing subscriber base * Great revenue stream but spending/debt to match * Large barriers to entry * Good competitive position * Un-coachable management team which makes this deal not an investment option For more details see: Wikipedia U.S. Budget 101 © 2010 Tech Coast Angels 9
  10. 10. Who are the Tech Coast Angels? Tech Coast Angels, www.techcoastangels.com, the largest angel investor network in the United States, provides funding and guidance to more early‐stage, high‐growth companies in Southern California than any other investment group. Since its inception in 1997, TCA members have focused on building valuable companies, personally invested more than $100M, and helped portfolio companies attract more than $1B in additional capital, mostly from venture capital firms. TCA members give companies more than just capital; they also provide counsel, mentoring and access to an extensive network of potential investors, customers, strategic partners and management talent. TCA has more than 300 members, including its venture capital affiliates, in five networks in Los Angeles, Orange County, San Diego, Westlake/Santa Barbara and the Inland Empire. Investor Presentation Guidelines ©2010 Tech Coast Angels