Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Portfolio > Alternative Investments

The Due Diligence Checklist

Your article was successfully shared with the contacts you provided.

If you are a wealth manager who evaluates and invests in private ventures on behalf of your clients, you can bet that startup entrepreneurs and issuers will find a way to your door. This is certainly good for deal flow, but unsolicited inbound venture pitches can put a strain on your time unless you properly manage the process.

In last month’s column, I shared an efficient and effective script for advisors to screen unsolicited private venture investment opportunities. (See “Five Questions to End Unsolicited Deals,” Investment Advisor, April 2012.) Schedule permitting, I suggested that you give the entrepreneur five minutes of your time to hear the opportunity, in a manner that you control, in the form of five questions:

  1. What’s your elevator pitch?
  2. What is your competitive edge?
  3. How will you make money?
  4. How big is the opportunity?
  5. Why is your team capable of pulling this off?

If the answers to these questions resonate with you, you’ll likely want to take a closer look, but you still should retain control of the conversation and the subsequent due diligence by clearly identifying the items that you wish to see next.

Rather than fall into the “send me something and I will take a look” trap, make a specific request that the entrepreneur send you the following 10 items:

  1. A 1–3 page executive summary.
  2. Detailed biographies for the founders and key employees.
  3. The deck that is used to introduce the company to prospective investors.
  4. The marketing deck that is used for business development.
  5. A summary history of the company’s capitalization to date, including the dates, amounts and terms of each round of funding.
  6. The three closest competitors to the business model.
  7. The three most recent clients or the company’s first three client targets (if pre-revenue).
  8. Revenue history to date.
  9. A one-page narrative that provides more specifics with respect to the company’s sustainable edge, unique differentiators or competitive advantages.
  10. Please don’t include anything else, but put this all in a single PDF.

As one who subscribes to the notion that it is better to invest in an “A” team with a “B” idea than a “B” team with an “A” idea, the deeper dive into the background of the founders and key employees is critical. The capitalization history provides a meaningful time line and indication of contemplated valuation. The marketing deck for business development should convey the clarity of the company’s value proposition to its market, and a substantive response to item No. 9 is material to the success of any venture.

The single PDF is a time saver that enables you to print out or pull up one single document when you get around to reviewing the opportunity.

Invariably, the entrepreneur will ask you for more time to talk by phone or in person to provide background or color with respect to the history of his company or some of the items that you requested. Avoid this time trap. Your review of these 10 items will determine if a follow-up conversation is in order. Similarly, don’t accept his offer to include the offering documents as there is simply no immediate reason to review them at such an early stage of due diligence. Finally, if the entrepreneur asks you to sign a non-disclosure agreement—don’t. That request illustrates his naiveté and is a waste of your time.

If after receiving and reviewing these 10 items you continue to be interested in the proposed opportunity, in due course you will request financials, the capitalization table, a summary of intellectual property, a detailed use of proceeds, term sheet and full offering memorandum and subscription agreement. Controlling the process will save you time and produce better due diligence.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.