The Due Diligence Checklist

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.