Thursday, February 13, 2014

Due Diligence – An Entrepreneur’s Perspective

Katherine Sears is CMO and Co-Founder of Booktrope and is based in Seattle, WA.

Getting Funding Means Surviving, and Thriving During Due Diligence

You have heard the phrase, “Due Diligence” (which I intentionally capitalize here to indicate the formal import of the term), but aside from hoping it will end with a big investment that allows your business to get to the next stage, you may not have put much thought into it. Or the opposite, you have heard all the war stories and are terrified. Well, here is a quick look at what to expect when viewed from the entrepreneur side of the fence. Note that this is my perspective, and your mileage can and will vary – also, I am not a lawyer and you will want one of those if you are going through this – if your lawyer tells you something different, take their advice, not mine!

Dating and Due Diligence
Dating due diligence Seattle Angel Conference

I heard the “pitch” process compared to dating once. I guess that might depend on where you are pitching, and what your dating experience was like, but I like this analogy better than sports, because there are fewer rules, and far more variables. Much like dating. Here is the way I might extend that comparison.
  • 3 Minute Pitch – speed dating
  • 10 Minute Pitch – date
  •  In Office Pitch – Blind date set up by friends


Getting Serious

I would consider going through the Due Diligence process to mean you are actually dating, and trying to decide whether to get serious. If you are lucky it will be love at first sight, and won’t require the dating-standard “three months” to decide. But, I think that depends a lot on the group you are working with, and what round you are raising (a series A from VC’s may be more intense and lengthy than a seed round with a few known angels). In other words, just like dating, the time frame answer really is “it depends”.

Advice for Due Diligence

Here is my overall experience and advice with respect to Due Diligence (not just with the Seattle Angel Conference).
  •  Be prepared to dive deeper than you think you will need to.

  • No matter how much time you think you will spend on this process, you will spend more. The larger the sum of money you are raising, the longer you can expect to spend in Due Diligence.

  • Be as prepared with your financials as you can be. Most early stage companies do not have a CFO, but you should be able to show your books, and explain where the money is and isn’t being spent.

  • Get your revenue projections in shape. Yes, we all put the prettiest version on our pitch deck slides, but this is spreadsheet territory and you now need to explain where that pretty number came from, and be up front about how big a stretch reaching it actually is. 

  • *It* (meaning the answer to 90% of the questions you will be asked) is obvious to you, because you eat sleep and breathe your company. *It* will not be as obvious to the Due Diligence team. Assume they have already forgotten your pitch deck, so even if you thought this was a key reason why you are even going through Due Diligence now, you may need to explain *It* again. 

  •  Know that you may see the same question rephrased a few times. If this happens, you are probably not understanding what information is actually being sought and your investor is trying to get the answer out of you. This will be especially prevalent if you are creating a new market versus tapping into an existing one, as it is harder for outsiders to truly understand it all. Your potential investors are asking questions based on what they know, they do not yet truly know your business – that is the point of this whole exercise after all. (Imagine you are trying to learn a foreign language and you ask a native speaker what a word means, and they use another word you also don’t understand to explain the meaning.) Your job is to try understand what that true concern is, and then explain it. Don’t be afraid to ask for clarification.

  • Yes, you do have competition. There is NEVER a scenario where you have none. You may be doing *It* better/stronger/faster/more effectively – but if there is enough of a market to warrant you succeeding, someone else somewhere is doing something related. Remember that just because you know you are different, the public (and potential investors) do not. Perceived competition is real competition.

  • Similar to the above, you do have risks. Not just vague ones; real tangible risks. It is your job to know what they are, articulate them, and indicate what you are doing to minimize them.

  • Everything must be in writing. A conversation does not count. Once upon a time, all start-ups had 50+ page business plans. The reason for this was to force you to undertake the thought process for answering critical business questions, and then to articulate it. The other thing this got you was a handy place to cut/paste or point people to, when answering 90% of the Due Diligence questions. Now that most of us use PowerPoint and Excel for this practice, it may mean you have to create a bunch more written material as part of this process. 

Now, let’s be clear, Due Diligence is rarely going to be how most of us would like to spend our time. We are entrepreneurs, which means we like the strategy and creative/innovative side of the business world. But, it is truly necessary if you will be taking outside investment. Not only for the investors, but for you! Just as you wouldn’t be likely to marry someone without dating, you wouldn’t want to take someone’s money without this step.

And here is the most important thing I can tell you 

- if during the process you realize it is not a good fit for you to work with this investor (or group), you must be prepared to walk away. Taking money from the wrong investor will only result in a bad long term relationship that you are bound to – and it is far harder to get out of than a romantic relationship. Don’t just see dollar signs. See the investor attached to the money and ask yourself if you want to work with them. If the Due Diligence process does nothing else, it will help you understand how you will, or won’t, work together in the long run.

-Katherine Sears-
About Booktrope:  Winner of Seattle Angel Conference IV ( SAC IV)

Booktrope is a team publishing platform and modern marketing engine for books of all kinds.

Our platform organizes and controls the process of making real, quality books – both ebooks and print. This is not self-publishing. This is real publishing of quality books streamlined using the latest proven online team methodologies.

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