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Investigation and Analysis of Start-Ups Evaluating Management Teams and Related Due Diligence Issues |
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By: Terry Collison, Blue Rock Capital. Used by permission.
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TERRY COLLISON is a co-founder of BLUE ROCK CAPITAL. Previously, through 11 years of work as an advisor to entrepreneurs, young companies, and investors, Terry helped a wide variety of companies develop commercialization strategies, management teams, marketing programs, formal business plans, and new financing. BLUE ROCK CAPITAL makes venture capital investments in high-growth seed-stage and early-stage companies from New England to the Carolinas.
How could you possibly know? Formal tools for assessing managers' strengths, weaknesses, and personality traits
Informal and qualitative tools
Goal: to "flag" key issues Goal: to form an overall judgment
The 8 Tests
Test 1: The Introductory Test Test 2: The Sniff Test Test 3: The "Issues" Test Test 4: The Functional Test Test 5: The "First Impressions" Test Test 6: The Second Meeting Test Test 7: The Reference Test Test 8: The "Carry" Test Test 1: The Introductory Test
Everything is a clean
slate, right? How did you hear about this deal? How do the individual managers who present the investment opportunity set the context? How do the individual managers describe and present the key issues? Is there any "road map" described?
Test 2: The Sniff Test Making a judgment based on what you know right now! Investment criteria are the key Hand-out Worksheet
What does this tell you?
Creating your own "Working Agenda"
Test 3: The "Issues" Test Is there any kind of problem here? Problems Objectives Conducting a SWOT Analysis Implications? What's needed here? Collison's Axiom of Planning
Collison's Axiom of
Planning “Problem-solving” is not “planning.” “Planning” is not the same as “problem-solving.” Effective planning cannot be done without identifying, understanding, and addressing the problems that are critical. Not all problems deserve attention. Some will just go away.
Test 4: The Functional Test "All we need is your money because everything else is in place."
Making an Activity-Based Model of the company
The Body Count/Skills Inventory Roles and Holes So what? What changes as a company grows? Test 5: The "First Impressions" Test If this is "first," then why is it here? Appearances, if not deceiving, are, by definition, incomplete. Appearances, even if incomplete, can be eerily accurate. What's that doodle? The "wife" test (no, I didn't mean "spouse"…. I mean my wife – who just “knows”) Test 6: The Second Meeting Test Plotting a trend line with one data point Expectations Make an agenda for yourself Plotting a trend line with two data points Does "time" make you smarter? Test 7: The Reference Test Why do due diligence? Annotated reference lists Calling vs. meeting vs. sleuthing Getting and using secondary references What happens to all this information? Now what do you know? And what will you do about it? Test 8: The "Carry" Test Bad coffee at 11 o'clock Pitching your partners Are you ready to put your fate in somebody else's hands? The 8 Tests
Test 1:
The Introductory Test Test 2: The Sniff Test Test 3: The "Issues" Test Test 4: The Functional Test Test 5: The "First Impressions" Test Test 6: The Second Meeting Test Test 7: The Reference Test Test 8: The "Carry" Test Final Thoughts The trick in conducting effective due diligence is to be proactive without talking all the time . . . In the final analysis, remember it's a judgment call. It's never final. n A parable . . . (see next chapter) A due diligence parable….
Eventually, he met up with the Sheepherder and said “You have fine sheep there, my friend.” “Aye,” replied the Sheepherder,” and prize-winners all they be.” “Say,” said the traveler, “ are you a sport?” “Yes, I guess I be,” replied the Sheepherder. “Then,” said the traveler, “if I guess the exact number in your flock, can I have my pick? After thinking it over, the Sheepherder said “Well I guess ye can try.” The traveler looked hard at the vast flock, stared off at the sky a minute, closed his eyes, and then said “You have exactly 2,373 sheep.”
“Ye bested me, lad,” exclaimed the shocked Sheepherder. The traveler walked over to one of the animals, picked it up, and headed back to his car. “Wait!” shouted out the Sheepherder in alarm. “Ye have picked my favorite animal. Now be a sport with me, lad. If I guess your occupation, can I have my animal back?” “Well, I guess so,” the traveler acceded. Instantly, the Sheepherder said “It’s clear ye be a venture capitalist, lad.” Startled, the traveler admitted that he was, in fact, a venture capitalist. “But how on earth were you able to come up with that?” he queried. “That be easy,” answered the Sheepherder. “Out of 2,374 animals, ye picked the only dog.” (The due diligence lesson? Avoid the dogs.) Blue Rock CAPITAL WILMINGTON, DELAWARE
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