SWO Angel Group

Due Diligence Lunch and Learn Recap

September 12, 2018

By: Dennis Ensing

About a dozen SWO Angel’s members and sponsors representatives gathered this past Wednesday to attend the final session of our 2018 Lunch & Learn series. Effective due diligence is critical to our investor activities – not just to avoid bad investments, but probably more importantly to understand the entrepreneurs’ and venture’s “transformability”.

Benton Leong, from GTAN, says that there are no perfect deals and we need to use our deeper dive in due diligence to look for good deals that we can transform into great ones: “Entrepreneur “transformability” is 10X as important as checking boxes.”

I presented to the group, along with our Analyst Bernie Batt and Miller Thomson’s Curtis Cleaver. We started by reviewing the basics of what should be a trust building and transformational process, not an adversarial one. To lead off, we talked a lot about the end goals of due diligence, including:

• Leads to negotiation of terms
• Helps establish valuation
• Educates the entrepreneur
• Builds the foundation for the future relationship
• Verifies alignment
• Identifies the “coachability” of the CEO

Both presenters and attendees shared several examples of how and when all of these worked – either leading to the successful close of an investment or to a decision not to do so.

Due diligence begins shortly after the venture’s. We pre-schedule a deeper dive meeting with the founder and their team members for a far more detailed presentation of their vision, business model and plans. But before that session is held, our interested members have been given access to the venture’s data room so that questions can be prepared ahead of time and ensure a strong dialogue.

Usually the output from that first deeper dive session is the preparation of a due diligence plan – dividing up the work, designating the lead investor, setting deadlines, defining communication and identifying key issues and potential deal killers. These will incorporate the other elements we then undertake with the founder, hopefully in as short a time as possible:

• Site visit(s) – to understand the company culture and connect with employees
• Management team analysis and reference checks
• Product and market analysis – including customer interviews
• Financial analysis – including the evaluation of future financing needs
• Negotiating the term sheet

Curtis did touch on the important “hygienic benefits” that the legal part of due diligence contributes before closing. These ensure the company is clean, doesn’t have skeletons in the closet and that record keeping is acceptable. Other red flag “hygiene” issues in founders we discussed included: those who lack self-awareness, fail to understand their weaknesses, are excessively defensive, lack transparency, or are immature. These should remind you of the “Character Matters” Lunch & Learn we ran earlier this year with Dr. Mary Crossan!

Coming soon to all of our Alliance (GTAN, Angel One and SWO Angels) investor members is a revamped lead investor playbook that will include the expected workflow and effective tips to manage an effective due diligence process. Stay tuned!