Ronald Reagan famously said Trust BUT Verify, when speaking about nuclear disarmament. No statement rings as true when you are an entrepreneur. It is your job to make sure that you are making the best decision for your business and your bottom line. Overtime I have crafted and honed my trust but verify skills and have become adept at conducting due diligence.
What is Due Diligence?
Due Diligence is defined as:
a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and evaluate its commercial potential.
Often new entrepreneurs, business owners, or investors believe that they can just wing this part of decision making and rely solely on their intuition or few meetings before deciding, but this is not sufficient.
Due diligence should be under taken for any decision that you are considering—new partnerships, accepting funding, selecting vendors and yes even taking on large customers that may have a large impact to your bottom line. Each of these reasons carry a different set of questions and level of scrutiny.
Here are few tips to get started and potential red flags:
1. ALWAYS ASK FOR DOCUMENTATION
Due diligence generally starts after several meetings regarding the collaboration. It is imperative that these meeting be followed up with getting the terms in writing. Once this happens then begin to ask for the pertinent documents. For example: if you are deciding whether to make an investment into a business that business should be able to give you their plan for growth in writing.
RED FLAG: If the target is unable or unwilling to put things in writing or if they have not taken time to commit their plans to paper they may not be a good partner. If you get a tremendous amount of push back RUN!
2. ASK FOR PREVIOUS PROJECTS COMPLETED AND RESULTS
If you are selecting a vendor always ask for references and examples of other projects. Be sure to ask the about key metrics including outcomes, time to completion, challenges, and any delays or deviation from the original project or schedule.
RED FLAG: While no two projects are ever the same be careful if the firm cannot directly speak to their experience. They may be learning on your dime and that can be costly or lead to less than optimal results. If you are interested in working with a less experienced firm be sure to provide lots of oversight and feedback or pair them a more senior adviser to ensure you stay on course.
3. REVIEW THE FINANCIALS
Even a quick review of a company’s finances can be very beneficial. This is especially true when you are selecting vendors, deciding on merger, or making a charitable contribution. Be sure to look for things like month to month cash flow, cost of goods, and operations costs. A bloated budget or insufficient funding into key areas can be very informative from a company health perspective.
RED FLAG: If a company cannot produce basic bookkeeping head for the hills. If there is no financial records or if they are poorly constructed that gives you critical insight into the priorities and potential risk associated with working with the organization.
4. CALL CUSTOMERS OR REFERENCES
Getting a third-party opinion can be more informative than speaking to the owners. References can offer insight into the company’s character while customers can show you what their commitment to service and quality are like. I would speak to the reference and customers yourself rather than accepting written accounts.
RED FLAG: If the company insists on being present for any conversations they may be attempting to control the conversation or the narrative. A company confident in its work product will have no issue providing you with a names and numbers.
5. READ THE CONTRACT
Yes, read the contract! I see many disputes arise because one or both parties did not actually read what the contract says. This is critical. I always advise any contract review and interpretation occur with a BUSINESS attorney. Not your cousin who does divorces not your smart niece that wants to be an attorney. Use a licensed attorney. Be sure you understand what the contract says and what your obligations are.
RED FLAG: If you are not given a chance to make edits to a contract you should proceed with caution. Generally, contracts favor the person who wrote it. That means if they unwilling to allow for consideration of your comments that may be indicative of how the relationship will go. This is not to say that there may be portions that are non-negotiable but that generally is not the entire project.
Arm yourself with information before deciding.
For expert help on conducting due diligence give RW Capital Partners a Call!
Over the past few years I have begun to notice that many people working in the entrepreneurship space get stuck in the brainstorming mode. They tend to move from idea to idea, dreaming up all the ways that they could hit the jack pot. Ideation is barely the first step in business. As an investor, I see hundreds (if not thousands) of ideas. It is an unfortunate fact that many of them will stay ideas. What many people forget is that they need a plan and more importantly they have to EXECUTE.
If you find yourself in the perpetual idea cycle and need to push something forward here are a few tips on improving your execution skills.
In order to become better at execution, be clear on what you are driving towards. Take the time create a map. Ask yourself: What are the steps between you and your destination? Write them down and then begin to break each step out. To borrow a cliché a journey of a thousand miles begins with one step.
Now that you have your roadmap and have listed out and organized the steps that need to be taken, give yourself deadlines. These deadlines should be hard. If you make excuses to yourself or find yourself repeating how busy you are, enlist an accountability partner. That partner should know the map and know the deadlines. With the help of an accountability partner you can stay on course.
Sideline Your Creativity
This one is likely the most controversial tip on the list. If you are oriented more towards brainstorming or ideation, then do not allow yourself to move to the next concept until you have put the current one to bed. Even though I am a person who is very very very good at executing (I say humbly), I still need to keep myself on one idea. Here is what I have done in the past. I give myself 30 minutes to 1 hour to brainstorm or ideate, generally at the beginning of each day. I write all the concepts or thoughts down in a notebook. The notebook serves two purposes it allows me to get my idea fix in and I have a record that I can come back to. I am on my 10th notebook. While, at first it will feel like you may be missing out on the next big idea you had, I promise you are not.
Ideas are no good without execution. In the investment world when we evaluate the investment potential of a business we are looking at the team members and deciding how likely it is that they can execute on the concept. Make sure that you assemble a team that is ready to EXECUTE otherwise you will be another good idea that dies on the vine. Be honest with yourself—understand your personality and which parts of the business you enjoy. Remember most investors would rather have a second-rate idea with a first-rate execution team than vice versa. So, EXCUTE, EXECUTE, EXECUTE!
I’ll answer the question upfront--WE WANT THEIR MONEY BACK PLUS SOME! This may seem like an obvious answer but many entrepreneurs forget the basic exchange between a business owner and an Investor. There are many types of Investors and they all have different return requirements. However, an Investor is NOT a Philanthropist. Philanthropists give money to causes to promote the welfare of others. Let’s start with the basics; the who, what, when, where, and how.
Friends, Family, (and sometimes Fools)
This is typically your easiest group of investors. They are mainly investing in you rather than your idea. You may be able to get a few thousand dollars towards your idea. These investors also require a return but likely will not require much (if any) equity or return. Advice do not give 50% equity for this investment. While this is critical capital, the equity in your venture is important. Small sums of investment for large stakes will do much more harm than good.
Who: An Angel Investor is generally individuals that invest their own capital into an entrepreneurial company. Angel investors are not necessarily millionaires. To be an accredited angel investor you must:
What: What Angels invest from an industry perspective is highly variable. Angels are generally seeking a greater return than they can get in the stock market.
When (company stage): Angel Investors generally are a source of seed capital. Seed capital is the first level of capital after you have tapped out your own means and the FFF pool described above. Companies in the seed phase generally are not revenue generating and are still in the product development, testing, or R&D stage.
How (much): Angels invest anywhere from $100,000- $1.5 million. Some Angels may invest micro-amounts from $10,000 to $50,000.
Where (is the exit): This is highly variable. Lots of Angels will issue convertible notes. Convertible notes are loans that may convert to equity. This means that the investor may exit early if you have the capital to pay the note (or in some cases the instrument will convert to equity mandatorily).
Venture Capitalists (VC)
Who: A Venture Capitalist is a person who invests in a business venture at either the start-up or the expansion phase. Lots of Venture Capitalists do not use their own money for investment but rather the funds are raised and pooled. The funds may come from wealthy individuals or institutions.
What: Venture Capitalists tend to have specific industries that they will make investments in. It is critical to first understand what the fund is interested in. Venture Capitalists are generally seeking HIGH GROWTH companies. These companies give the VC the greatest chance of hitting that 10x return or home run they are seeking. This may mean your main street business may not generate these types of return therefore are not of interest.
When (company stage): This can become murky. A VC can invest in companies that are early stage, growth stage, and later stage. Some portfolios will have a mix of all three. Early stage are those companies that are beyond the start-up phase and may be ready for a commercial release. A growth stage company is a company that is expanding or scaling up. A later stage company has grown through the commercial manufacturing and is likely preparing for an exit, possibly going public.
How (much): How much a fund is willing to invest generally depends on the size of the fund. For example, it would be unlikely that a small 20 million-dollar fund would invest $10 million into a single project. Conversely, a 200 million-dollar fund would like not invest only $1 or $2 million into a company. Get to know what the funds thresholds are and know whether the investment you seek is too large or too small for your target.
Where (is the exit): VC’s typically are going to hold an investment for 5-7 years, possibly longer.
There are several other types of investors. Understanding these basic groups will take you a long way on you search for capital. When seeking funding from an Angel or a Venture Source understand that the basics principles apply.
1. There has to be a clear method of generating a return. If it is not clear where the money will be made YOU ARE NOT READY FOR INVESTMENT.
2. There has to be an exit. Investors are not Founders, they do not want to be involved in the company for generations. If you are looking to build a legacy VC FUNDING IS NOT FOR YOU!
Always do your homework on your targets and be ready to speak to how you fit their profile.
Dr. Shante Williams is a serial entrepreneur who started slow and in the shallow end of the business pool. She has worked in Biotech, Big Pharma, Green Energy, and Academia