Venture Financing:

Step-by-step Guide

Investigation and Analysis of Start-Ups

Evaluating Management Teams and Related Due Diligence Issues

By: Terry Collison, Blue Rock Capital

Venture Financing Funnel    

Venture Financing: Key Documents

Assessing the Team

Each venture investor usually evolves its own time-tested approach for evaluating the management teams at companies it sees as investment candidates. The goal is to come up with an assessment that is fair, balanced, and, most critical, predictive.

How could you possibly know?

       Formal tools for assessing managers' strengths, weaknesses, and personality traits

  • HR departments

  • Executive recruiting firms

  • Out-placement services

  • Venture capital investors (?)

       Informal and qualitative tools

  • 8 complementary approaches

  • Each with its own "test"

       Goal:  to "flag" key issues

       Goal:  to form an overall judgment

 

The  8  Tests

Test 1:                        The Introductory Test

Test 2:                        The Sniff Test

Test 3:                        The "Issues" Test

Test 4:                        The Functional Test

Test 5:                        The "First Impressions" Test

Test 6:                        The Second Meeting Test

Test 7:                        The Reference Test

Test 8:                        The "Carry" Test

Test 1:  The Introductory Test

Everything is a clean slate, right?

       How did you hear about this deal?

       How do the individual managers who present the investment opportunity set the context?

       How do the individual managers describe and present the key issues?

       Is there any "road map" described?

  • If so, how?

  • Who does it?

  

Test 2:  The Sniff Test

Making a judgment based on what you know right now!

          Investment criteria are the key

          Hand-out Worksheet

  • How this is organized

  • And Why?

           What does this tell you?

  • Example case

  • Do-it-yourself

           Creating your own "Working Agenda"

  • Check-marks and circles

  • Free-form text

  • Following up . . .

Test 3:  The "Issues" Test

Is there any kind of problem here?

       Problems

       Objectives

       Conducting a SWOT Analysis

       Implications?

       What's needed here?

       Collison's Axiom of Planning

Collison's Axiom of Planning

       “Problem-solving” is not “planning.”

       “Planning” is not the same as “problem-solving.”

       Effective planning cannot be done without identifying, under­standing, and addressing the problems that are critical.

       Not all problems deserve attention.  Some will just go away.

Test 4:  The Functional Test

"All we need is your money because everything else is in place."

       Making an Activity-Based Model of the company

  •  Will it change?

  •  Should it change?

  •  Why?

  •  And how?

        The Body Count/Skills Inventory

        Roles and Holes

        So what?

        What changes as a company grows?

 Test 5: The "First Impressions" Test

If this is "first," then why is it here?

       Appearances, if not deceiving, are, by definition, incomplete.

       Appearances, even if incomplete, can be eerily accurate.

       What's that doodle?

       The "wife" test (no, I didn't mean "spouse"….  I mean my wife – who just “knows”)

 

 Test 6:  The Second Meeting Test

       Plotting a trend line with one data point

       Expectations

       Make an agenda for yourself

       Plotting a trend line with two data points

       Does "time" make you smarter?

 

Test 7:  The Reference Test

       Why do due diligence?

       Annotated reference lists

       Calling vs. meeting vs. sleuthing

       Getting and using secondary references

       What happens to all this information?

       Now what do you know?

       And what will you do about it?

 Test 8:  The "Carry" Test

       Bad coffee at 11 o'clock

       Pitching your partners

       Are you ready to put your fate in somebody else's hands?

 

Final Thoughts

       The trick in conducting effective due diligence is to be proactive without talking all the time . . .

       In the final analysis, remember it's a judgment call.

       It's never final.

 

Venture Financing

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Venture Acquisitions

Investment Opportunity Selection by Investors

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Business Plan DOs and DON'Ts

How Investors Read a Business Plan

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Equity Investor's Compensation

Terms of Preferred Stock Issued to Venture Capitalists

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Private Placement Memorandum

Private Placement of Convertible Stock: Sample Term Sheet

Terms and Conditions for Securities Offerings

Jokes

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