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Archive for the ‘Venture Capital’ Category

If you’re a company preparing for a financing round in the near future, you should already know what is a Due Diligence (commonly known also as DD). If not, read on. If you do know what Due Diligence is, you might be interested how to do is cost-efficiently.

Wikipedia defines Due Diligence as follows:

Due Diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person prior to signing of a contract, or the performance of an act with a certain standard of care.

Nowadays there are many kinds of Due Diligences, for example Legal, Financial, Technical, Commercial and Environmental. The scope of the Due Diligence will depend on the size and scale of the transaction and the surrounding risks.

We will focus here  on investment-round related Legal Due Diligence, and more specifically on Vendor Due Diligence which is done by the company itself in the preparation phase of the investment round. Due Diligence prepared for an acquisition is in many aspects similar to what we discuss here, but has naturally its own specific issues.

Legal Due Diligence focuses on showing that the future prospects of the company have a secure legal base. For example, it includes information about intellectual property rights (IPR) and customer as well as employee agreements.

Financial Due Diligence focuses on financial issues, and the most important of these usually fall into the categories of earnings, assets, liabilities, cash-flows, net cash or debt and management. In a typical investment round for a early-stage company these (historical) figures are often NOT the ones where the investment is based on.

Commercial Due Diligence is the process of investigating a company and its markets. It typically gathers information concerning published market information as well as information from customers, competitors and other market participants. While Financial Due Diligence is looking at the history, the Commercial Due Diligence is “forward-looking”.

Vendor Due Diligence is a Due Diligence that is made by the company itself. It’s often likely that your investors will make their own Due Diligence, especially if it’s about a larger amount of money. Vendor Due Diligence and a Due Diligence made by the investors are by no means contradictory. And as crowdfunding-style investment rounds are getting more popular, there is an increasing need for quality-evidence to be shown by the company. Vendor Due Diligence is very good for that.

In practise, a Vendor Due Diligence will be done with the help of a Virtual Data Room. It’s an online, secure storage which will help to store and process all the material, whether it is information filled with template or uploaded PDF’s.

By now you must already be thinking that there is no guaranteed quality in the Vendor Due Diligence. You’re right, and wrong as well. When done properly, the Vendor Due Diligence is completed by a verification by an external, independent lawyer. A properly made Vendor Due Diligence together with qualified verification is very valuable tool as part of an investment round.

We at Venture Bonsai have created a standardized and easy-to-use self-service, on-line Vendor Due Diligence process for small and medium-size software/mobile/Internet companies. You can complete it without extensive legal knowledge and have the information verified by your local lawyer. Its main purpose is to guide you through the most important aspects of the Due Diligence. It’s not fully complete, so to say, for that you still need to hire your lawyers. But the reality is that practically no companies looking for funding are doing any kind of Due Diligence so this will both help you to differentiate and find possible holes to be filled. If you’re interested, please get in touch.

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Today I had an opportunity to participate a pitching event arranged by FundingPost.com, in Palo Alto, California. The event consisted of group of entrepreneurs pitching for the audience and then the panel of Venture Capitalists giving comments on the state of the industry and the presentations as well.

It was stated that Friends&Family investment rounds can typically be up to half a million dollars (unless you have really rich friends and family) and VC investments typically start at 2 million. So there is a great gap in between, and that has increased the deal flow for angel investors. At the same time “time to liquidity” ie. time from investment to exit has doubled. Today, investors may have to be prepared to stick with the company even more than 10 years.

As always, some companies are more “hot” than others. That influences the interest to invest. In the best position is a company whose product or service is creating traction, revenue and is growing. Those companies may enjoy, even today, receiving several competing term sheets. On the other hand, rest of the companies have much more difficult situation.

Comparing the pitches to those seen back at home, there were few differences and many similarities:

  • wider range of industry segments
  • generally older and more experienced entrepreneurs
  • looking for funding in the range of 300,000 to 8 million
  • quality of pitches varied but in general, again, more or less same range than in Europe
  • in some cases more “forward-looking” pitches, with probably less substance but true interest

There were number of investors in the panel, moderated by Adrian Shulman, Partner at Bingham McCutchen.

I’m sharing some of the most interesting comments, in my opinion, what they said.

Ho Nam (General Partner & Co-Founder of Altos Ventures) said that they are looking for interesting phenomenon.

Obviously the best time to raise money is when you don’t need it. Venture Capitalists are like sheep, they move in herds. It’s entrepreneurs who think out of the box and are the smart ones in this room.

John Hall (Managing Director of Horizon Ventures) said that typically an entrepreneur should get investor’s attention within one minute. The problem and the solution must be so simple that your mother could understand it. Only after that message has gone through, it makes sense to go to the details. He also advices entrepreneurs to do background research on the investors, like have they done similar investments before. That way you also know to contact the right partner at the investor company. A good resource to check VC background, by the way, is The Funded.

Steve Goldberg (Partner at Venrock) said that they are looking for evidence of big market, early customers, great execution plan and team of people who can do it.

We fund entrepreneurs and we fund CEO’s.

Eric Chen (Venture Partner at WI Harper Group) was comparing the US entrepreneurial scene to that in China. He said in China even those start-ups who have million dollar revenue may not get funding as the competition is tough.

So what’s the biggest difference, say between Silicon Valley and Finland?

I’d say it’s the atmosphere, at least. And as it is all about motivation, acceptance of entrepreneurs but also competitiveness. It’s more likely here for entrepreneurs to keep trying, even after failing.

And how does our upcoming Venture Bonsai relate to this? As it’s a tool for entrepreneurs, it makes running a (crowd)funding round (with many investors) easier. It’s primary not meant for getting VC’s onboard, as it’s more for the seed stage. The standardized documents such as Shareholders’ Agreement, however do take into account VC investment being possibly the next step.

In summary, it was quite interesting to see the event, and gave a lot of things to think about, again.

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