Home     Site Map     Business Coach     Venture Financing     Innovation Management     Technology Transfer     Slide Shows

 

Venture Financing

Due Diligence

 

Due diligence is a form of research, a reasonable investigation conducted by the parties involved in preparing a registration statement to form a basis for believing the statements contained therein are true and that no material facts are omitted. For the venture capital investment process, due diligence means a rigorous investigation and evaluation of an investment opportunity before committing funds. This process includes review of its management team, business conditions, projections, philosophy, and investment terms and conditions.

Absolutely vital to making a sound investment, due diligence verifies any business opportunities that survive the initial screening stage. For venture capital investments, as few as 10-15 percent of proposals make it past the initial screening stage to the full due-diligence process, and only 10 percent of those receive funding. This verification process consists of checking the accuracy of business plans, audited accounts, and management accounts; getting replies to warranty and other standard questionnaires; patent searches; and technical studies. Unpublished accounting information and subjective information are equally important; these data are collected by calling customers, suppliers, lawyers, and bankers, and by checking trade journals. Due diligence emphasizes understanding and quantifying the risk of the proposed deal, rather than the upside.

Factors analyzed and verified during due diligence include:

  • Track record of the management team
  • Size and growth potential of the market
  • Demand for product among target customers
  • Ability to deliver product on time and at agreed price
  • Competitive advantage of product
  • Competitors
  • Marketing and distribution plans
  • Soundness of financial projections
  • Assessment of assumptions used
  • Assessment of intellectual property rights, if any
  • Existing or possible legal contingences
  • Valuation for the venture.

Due Diligence Study Areas:

Management

Chief Executive Officer; Number Two & Three in Management; Management as a Team; Organizational Structure & Decision-making; Management Characteristics; Corporate Ownership; Documentation; Management Reports; Strengths & Weaknesses

Personnel

Corporate Organization; Employee Compensation; Profit-sharing Plan; Bonus Plan; Payroll Records; Training Program; Attitude and Morale; Record Maintenance; Reports; Motivation; Hiring Procedure; Consultants; Ratio Analysis

Marketing

Marketing People; Products; Customer Description; Customer Service; Competitive Analysis; Industry Analysis; Marketing Strategy; Product Distribution

Production

Production Management; Personnel and Organization; Production Process; Purchasing, Suppliers, Shipping, and Receiving; Efficiency Analysis; R&D

Financial Area

Management, Personnel, and Organization; Cash and Investment Management; Documentation; Analysis of Financial Operations; Financial Statement Analysis; Other Assets and Liabilities; Taxes; Analysis of Projections

Reference Area

General information about the company; Reference List: Bank, Other Institutional Lenders; Accounting Firm; Law Firm; Suppliers; Customers; Competitors; Agents, Consultants, Stakeholders, Trade Associations, Brokers

 

See also:

"Evaluating management team and related due diligence issues", by Terry Colisson, Blue Rock Corporation