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Advice for Entrepreneurs: Part Two – Due Diligence Material

This is the second in a series of blog entries intended to give advice to entrepreneurs who approach Qi3 Ventures.

Think about it from my perspective.  It’s much easier to invest in a proposition if you have already thought through all of the questions that people will ask you, and prepare concise written material to release to potential investors who show serious interest.  Your preparation will thus look professional, and save me time scratching my head.

In a past investment, I was impressed that the entire due diligence pack was available for download from a secure web site.  This made the investment process so much easier, and gave the immediate impression of competence and preparedness. (They still went bust, but that was technology failure rather than lack of investment readiness).

The obvious checklist of due diligence information includes:

  • Corporate structure, shareholdings, articles of association
  • Past financial accounts and up to date management accounts
  • Service Agreements with key staff
  • Evidence of contracts and grants in place
  • Schedule of Intellectual Property with status
  • External market assessment
  • External technical assessment
  • External IP assessment
  • Appendices to the Business Plan, showing how assertions were arrived at

A recent due diligence pack also included the directors’ responses to the external assessments, so I was able to feel a conversation going on and understand more.

In contrast, it’s amazing how some entrepreneurs seem to expect the potential investor to dig out all of this information themselves, and not get bored or give up in the process.  Due diligence should be a matter of reducing risk and confirming one’s interest in a business.

This may seem daunting from the entrepreneur’s perspective.  But I can assure you that a well prepared due diligence pack speeds up the evaluation process and leaves a good impression.

 

2 Responses to Advice for Entrepreneurs: Part Two – Due Diligence Material

  1. My experience of helping clients raise money is that investors have a very short attention span when looking at investment proposals. This was confirmed to me by the director of a major corporate venturing organisation, who joked that VCs have the attention span of a 3 year old.

    The reason, of course, is that as VCs receive 50+ business plans per week, they can’t spend much time on digging out relevant information. Nathan’s point is very important; make it easy for them.

    Personal experience of presenting to potential investors also highlighted the importance of the elevator pitch. In investment forums, companies are usually allowed a few minutes (3 or 5) to present their idea. My personal experience in presenting to VCs is that you have 30 seconds to grab their attention. Otherwise they start asking questions taking the meeting in the wrong direction, or lose interest. If you can’t articulate why your idea is compelling for investment in two or three sentences, then VCs won’t spend the time trying to understand it. They have other fish to fry.

  2. Did you know that Business Angels that spend 20 hours or more in due diligence make better returns? This is according to a Nesta survey called ‘Siding with angels’ easily found on the web. They make better returns, I assume, because the investments they make are more successful.

    Businesses in general might do well to invest a little time doing due diligence on themselves and getting a third party to review it. It’s certainly a good exercise for a company seeking investment, and a role that mentors can fulfill in advance of pitching. Due diligence isn’t just about red tape – it’s an exercise in putting things right for the good of the business.

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