Taming the Dragon- Secrets of Due Diligence (Nelson Gray)
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1) Due diligence is an important process for investors to evaluate investment opportunities and reduce risk by identifying any issues or concerns. It involves investigating all aspects of a business including its market, management team, finances, legal structure, and product. 2) An investor should conduct due diligence before investing, when reviewing business plans and financial projections, when meeting the management team, and before finalizing any investment agreements. This ensures the business and deal terms still appear sensible. 3) Due diligence is a continuous process that helps investors determine if an opportunity is a good strategic and personal fit. It provides a reality check on an investment and opportunities to add value through the deal process.
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Taming the Dragon- Secrets of Due Diligence (Nelson Gray)
- 1. Due Diligence Nelson Gray nelson@nelsongray.com
- 2. !" # # $ # $ % # & # # & $ ' ( # ) * + , 2
- 3. Reality I should have done a lot more due diligence because a lot came out of the woodwork in the balance sheet in a very different light and I would never have invested. If I had to do it again, I would have dug deeper and not been in such a rush to put the money in 3
- 4. Post Investment Depression Wish I had: Done more due diligence 36% Had more contractual control 13% Invested more 8% Not invested 8% Recruited more people 6% Monitored more 3% 4
- 5. Perception of the Deal Process Finding Deal flow Initial Screening Due Diligence Valuation Negotiation Legals Monitoring Mentoring Exit 5
- 6. Due Diligence Why do it ? The Investor - To get to know the management. Evaluate the opportunity against your investment criteria / strategy. To reduce your risk find the lies. Identify areas for focus danger areas. To make go/no-go decisions. 6
- 7. Who does the Due Diligence? Lawyers? Accountants? Consultants? The lead Investor? Yourself? 7
- 8. Scope of Diligence Market Technology IPR Sales & Mkting Size Technical Risks Patents Value Proposition Trends Competing Trademarks Business Model Competition Technologies Know-How Sales Forecasts Oppts & Threats Product Mfr Design Rights Routes to Market People Operations Finance Legal Mgt Team Product Delivery Balance Sheet Staff Key Staff Customer Support Cash Flow Premises Roles & Systems & Controls P&L Suppliers Responsibilities Health, Safety, Mgmt Info & Customers Environmental Internal Controls 8
- 9. Due Diligence When? Before you get the Plan. General Market Knowledge. The Source of the Deal. When you read the plan. Personal Fit. Common Sense. When you meet the Management Do they have it. 9
- 10. Due Diligence When? During Negotiations What are Management like under stress? Still a consistent story? Are they listening? Before you Sign the Paper Have a reality check Business Still on Track? Deal still Sensible? 10
- 11. Elements of Due Diligence Screening Due Diligence. Management Due Diligence. Due Diligence on Intangibles. Business Opportunity Due Diligence. Financial Due Diligence. Legal Due Diligence. 11
- 12. Screening Due Diligence Quality of source, the plan, etc (Use of application forms?) 12
- 13. Angel Decision Making Initial Screening Personal Fit & Junk Filter (73%) Detailed investigation Due Diligence (22%) Negotiation and Contracting Only 5% get this far! 13
- 14. Due Diligence on Intangibles Not Intellectual Property but - Focus, momentum, buzz, your gut feeling. Will this be Fun? Can you add value? 14
- 15. Management Due Diligence Managements view of investors. Their motivation. Are they really Entrepreneurs? Do they have a CEO? Why will they be a successful team? Can you add anything? 15
- 16. Portfolio Fit? What will they be like after the deal? How will they behave in the hard times? 16
- 17. Business Opportunity Due Diligence Customers. Business model / scalability / market channels. Can it make required rate of return / IRR? Exit. 17
- 18. Remember the Basics Technology is rarely the reason for failure. Sales and marketing areas of weakness Many companies lack polish. The USA seen as a key market but most Non US companies struggle with this. 18
- 19. Financial Due Diligence Historical, Forecast & Present. Burn rate. How cash to be used development or past failings? What did the last business plan promise? Is the next funding addressed in the plan? 19
- 20. Legal Due Diligence History Tax A link between Due Structures (EIS) Diligence and the Litigation Legal process IPR Contracts Warranties Staff Indemnities 20
- 21. At the end of the day Whatever the Due Diligence Results Suggest: If it doesnt feel right, it isnt right. 21
- 22. Investor Ready Reverse Due Diligence 22
- 23. Gabriel or Lucifer The Companies Due Diligence. Basic Chemistry 損 Do you like them? 損 A balanced Board - match long term needs of Co 損 Control demands reasonable 損 Distribution requirements reasonable Get References Watch out for tyre kickers Do they have the cash? Follow on Work with them before committing. 23
- 24. Due Diligence Conclusions Its an ongoing and continuous process. Its an evaluation against personal criteria. Results will be evaluated in a personal manner. It should take a reasonable amount of time. Have a reality check before moving on. It should be a two way process. It provides opportunities for entrepreneurs.24