Center for Emerging Technologies Square One Program The Due Diligence Process & How to Be Prepared November 14, 2016
Agenda Speaker Introduction Investor 101 Getting us all on the Same Page Deal Flow: Fierce Competition for Capital Due Diligence 101 How Can I Put My Best Foot Forward? Excerpts from Michelle's Top 10 Tips Tip #8 Ask about the Process Tip #7 Follow Through and Follow UP Additional tips are covered in my other Education Series! Slide 2
Michelle E. Murray, CPA Managing Director Segue Partners was founded in 2010 by Michelle Murray, who has been in the trenches of Venture Capital for over a decade. Former Director and CFO of Prolog Ventures, LLC with $120M AUM Served entrepreneurial clients at Clifton Gunderson and Ernst & Young Licensed CPA with 20 years of experience, CVA license pending Inaugural member of NVCA CFO Task Force; served on FASB comment letter sub-committee re: fair value accounting (ASU 820). Investment reporting for 30+ portfolio companies Director for two venture-backed companies during their exits Slide 3
About Segue Partners Our mission is to be the preferred outsourced partner for Private Funds and their portfolios as they segue through their lifecycle: from formation to wind-down and everything in between. Our clients are venture capital, private equity, real estate and mezzanine funds, and family offices as well as their portfolio companies. We are more than a group of accountants. We have been in the trenches operating our own funds, raising capital, and reporting to investors. Our advice goes beyond the IRC Code, SEC, and GAAP. Our cost-effective process can help you save time, save money, and accomplish your goals. Slide 4
The Segue Model is Unique We offer a collaborative approach to help our clients avoid financial pitfalls and offer a full array of flexible services that allow us to tailor our services to fit our clients needs and budget. Services include: Private Funds Fund Formation Back Office Capital Calls IRR Modeling Web Portal Wind-Down Due Diligence Financial Statements Capital Accounts Outsourced CFO Start-Ups Transaction Advisor Investor Pitch Term Sheet Board Books Back-Office Research Potential Investors Financial Forecasts Financial Consulting Capitalization Tables and Waterfalls Slide 5
Investor 101 Angels and Venture Capitalists (VCs) = minority investors Voting rights give them control over key decisions Angels typically invest in Common Stock More aligned with management VCs invest in Preferred Stock Contains legal preferences over Common stockholders Average length of angel investment is 20-90 days from initial contact and average 3-6 negotiation sessions to close the deal VC funds have limited pool of capital and limited # of companies they can invest in per fund Timing is important Slide 6
Deal Flow: The Fierce Competition for Capital VCs typically invest in only 1% of their deal flow average 1000+ deals per year they track that fit their strategy Angels invest in 30% reject 7 out of 10 according to national statistics Terms of the investment (e.g. pricing/valuation) are based on the total potential return (IRR) to that investor Different investors require different IRR. Due Diligence is the investor s opportunity to really vet the deal, make critical decisions on the terms and compare the deal to other opportunities available to them, aka their deal flow No matter how good your deal sounds to you keep in mind you are competing with other potentially great deals Slide 7
Due Diligence 101 Definition of Due Diligence DD 1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale [of securities or company]. 2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party. Informal DD generally leads to a Terms Sheet, which is contingent upon completion of formal DD Limited investigation into markets, competitors, company and general business proposition Formal DD follows the Terms Sheet and must be satisfactorily completed before investment Next slide, please Slide 8
Typical Due Diligence Slide 9
Typical Formal Due Diligence Checklist 1. Corporate/Legal structure 2. Previous Securities 3. Assets and liabilities 4. Intellectual property 5. Financial Statements (past and projected) 6. Material contracts 7. Employment agreements 8. Regulatory may include technical specialists engaged 9. R&D results and plans 10. Market plans & Products 11. Management 12. Actual or threatened litigation Slide 10
Due Diligence Checklist: Insights 1. Corporate/Legal structure: LLC or C. Corp = depends on stage; LLC is fine initially, but VCs prefer C. Corp vs. a flow thru entity 2. Capitalization = shares outstanding times market price of stock; Pre-money Valuation vs. Post-money Valuation 3. Assets: include cost of trademark, copyrights, patent applications 4. IP = what is it; what is the status; what is long-term strategy? 5. Financials: Revenue, Profit and Margins (current and projected) this is the core approach to explaining the business model and how you will make a return for the investor do not short cut this step! Refer to my Tip #6 6. Material contracts: keep these organized from day 1 Slide 11
Due Diligence Checklist: Insights 7. Employment agreements: must include Confidentiality and address IP rights 8. Regulatory: If you can t afford an expert, do you have an advisory board you can rely on for advice? 9. R&D: ensure a clear, concise path that includes outside testimony that can be vetted 10. Market should include competitors in your industry don t forget market comparables and examples of larger companies that have paved your path! 11. Management: includes ownership of company - be prepared with references 12. Litigation: Don t hide it! don t hide anything be upfront with anything troublesome as it will serve you better in the long run! Slide 12
Ask about the Process Slide 13
How to put your best foot forward Excerpt from 10 Most Frequently Overlooked Issues by Entrepreneurs 8 Ask about the process and the next steps Who will be present at the first pitch? What do they want to accomplish at the meeting and how will they measure success? Don t waste precious funds and bring ALL of your staff! Ask the extra question to better understand where they are headed before you answer their question. Don t assume a two hour meeting that was scheduled for only one hour means it went well! Slide 14
If You Don t, No One Will! Excerpt from 10 Most Frequently Overlooked Issues by Entrepreneurs 7 Follow through and FOLLOW UP Realize that the Process is a test! If you fail at this, how will you manage a complicated business discussion at the board meeting? Fundraising is like a football game: the clock is running and you have to get the ball down the field to win! Hire or designate a good quarterback to manage the the process. The round will not close itself and the investors have too many distractions. Slide 15
Thank You Michelle E. Murray, CPA Managing Director MichelleM@SeguePartners.com 314-651-9524 cell 314-961-1111 office 7905 Big Bend Blvd. Suite 205 St. Louis, Missouri 63119 SeguePartners.com Slide 16