By Alan W. Urech
Ah, 2005! A fresh new investing year and an economically encouraging environment for it. I like it. I spot many new companies forming and fresh opportunities springing forward. With so many new companies being developed how does an Angel Investor decide and invest in 2005? How do they decide which ones are “Cherrys” and which ones are the “Pits?”
Easy for me to decide. Show me the clear path to the money! Make me drool about your business opportunity! Remember, though, that I am originally from a neighboring state to Missouri. Show me a strong, clear, crisp and concise path toward the money. Make it so that I can’t afford to pass up the opportunity to invest in your fine enterprise. Walk me down that path, but be truthful and honest about your “strengths” and “challenges” when you do. I want to build trust and an investment relationship with you.
The U.S. Small Business Associates states there are about 250,000 Angel Investors providing funding for about 30,000 small companies each year. This funding represents about $20 Billion in capital, averaging about $660,000 per company and $80,000 per Angel Investor.
What do I like? Many things, including meeting and working with new entrepreneurs and, importantly, the opportunity to grow a company and make money. I like organizations that have completed comprehensive Company Investment Due Diligence upfront and can articulate that they know what is important to me. I also like to know how I can support their success.
As an investor, there are certain critical investment criteria that compete for the investment capital I have allocated for higher risk organizations. I look upfront for these criteria and have developed an internal rating system for each of them. The top five “must” criteria that I look for in all investments includes trust in a strong, been-there, done-it-before management team with proven leadership and execution skills, a solid and focused business strategy, a great market opportunity in a market where the company can be first or second in its niche, current revenues with a clear path to significant future profits (revenue sources) and a well diversified customer base. The customer base provides me with the proof of concept.
Note that I did not mention what the product is or does at this point. I am just getting interested in how the company makes profit. Please note that I review at least 20 business propositions a week and most times more. You as an entrepreneur compete with these companies for Angel investment. With my wife and family wanting my time (and not to exclude my dog Elvis demanding her private one-on-one time), I need a real clear picture of the business, how much capital you will need in total, when I am going to get the money back and how much I am going to get back.
Once I am past these first 5 critical criteria and like it (my mouth is watering, but no drool yet), I am ready and eager to look at other important areas including the sales and marketing strategy, strategic partnerships and alliances, competition, the industry which the product resides in, the business environment, the technology (migratable, sustainable), use of proceeds, valuations, the ability to attract additional investment capital and the investor’s exit strategy. Be very honest and sincere on where the company is at this stage in its life. Angels can handle it and also it builds your trust. Now that is relatively simple isn’t it?
What are some of the “Challenges” that investors have when they are reviewing information about a company? Primarily it is shifting though the mud to get to a diamond that is so dirty that it can not shine brilliantly. Many times entrepreneurs cover the diamond with written and verbiage mud and this mud needs to be cleaned off by the investor so the brilliance of the diamond shows. It is very helpful if the company cleans off this mud first.
Every entrepreneur is excited and passionate about their company, but when it comes to giving a pitch to investors, they often don’t present the right information. Your “Investor Presentation” should be very clear and accentuated with bullet points. When you present, don’t take more than 12-15 minutes weaving your company’s story. If you have an hour with the investor, that leaves 45 minutes for their questions. Your objective is to answer the questions that the investor wants to discuss, not ones that you think are important. Most likely they have already read a synopsis about your company and have some follow-up in-depth questions in their minds. Lead off first with what the company does. Try to keep it 10 words or less. As a guideline when I am advising a company, I have them write out what the company does and then half it to a short clear and concise statement. Then state the business strategy or how you do it. This is how the company does their business. Then the market opportunity, then the management team, etc. Move quickly through other areas. One slide, one topic.
In summary, Angel investors are much more sophisticated and savvy in 2005 than ever before. They are ready to invest, but only in strong business propositions that meet individual investing criteria. They have more information, knowledge and wisdom from internet search engine sites that allow them to review your business proposition and determine if it is real and will fit within their personal investing criteria. They want to help entrepreneurs grow their companies and are eager to use their “network” to help you increase profits and market share.
This is Angel Investing: Dateline 2005
Sunday, January 11, 2009
Due Diligence for the Detailed Challenged Company
By Alan W. Urech
During the past few years, entrepreneurs have continually asked me the question, “What due diligence is now required by angels and investment capitalists?” They want to supply the information and knowledge, but question what that consists of. Entrepreneurs are now more than ever cognizant of the need for advice and consultative support to find the right mix of diligence that is needed to position their company in the best but most honest spotlight of where it is at the current time.
In the 1990s, company due diligence was not as much of a challenge because the passion of the leadership team, the market opportunity and the idea sometimes overcame the actual comprehensive business checks that are now being completed by our sophisticated angel and venture capital communities. The 1990s were exhilarating times where the anticipation of huge profits on innovative ideas overwhelmed the actual doing diligence on whether the management, business strategy or market opportunity was actually there to make money.
Well, because of lessons learned, comprehensive company due diligence is back in fashion today and getting strong support by the venture community. Why? Investors are still smarting over large capital losses from not completing comprehensive due diligence during the 1990s. We learn from our experience and knowledge, but sometimes a bucket of cold water helps.
Let's get into the “Grit” of what is needed by today's sophisticated investor and let's do it by the numbers. Here are a few rules and suggestions to follow.=
First and foremost, with all your company due diligence, be honest. Show where the company is at the time of investment to the best of your knowledge. Please do not over amplify, do not hide or keep anything under the covers. Full disclosure is best and being honest about where you are at this point of time is crucial. Let the Investor determine where the chips may fall. Just provide all the information. I remember one client of mine that exaggerated their market opportunity significantly and their ability to capture most of it. The angel investor just did some simple Internet searches and found out some significant competitors that were well capitalized and probably would not let their market share erode without guerrilla warfare. The angel did not trust the company management after this was determined and just quietly moved on to the next opportunity. There is no second chance to gain trust and a strong partner.
Second, understand that company due diligence is not an easy process. It is painstakingly detailed, time consuming and challenging. Only the most passionate entrepreneur will complete it and succeed, noting that the end product will strengthen their chances for capital when competing against those who did not give it the same respect. The company will have to slice and dice their information many different ways before the process is completed, knowing that different investors see the opportunity in diverse ways.
It is best to be completely upfront with the investor and provide an easy format for him or her to see the business as they want to review it. Often I see the entrepreneur wants to portray the business as the entrepreneur wants to see it which is different from the investor. Bad idea. The entrepreneur does not hold the “money cards,” the investor does. Once the due diligence process is completed, the investor will want to see a strong, focused company that has all the elements of success written all over it. Remember: The seller wants you to buy the future. The buyer wants you to buy the past.
Third, understand the due diligence components the investors are looking for. They are looking at you to clearly “show them the money.” They don’t have time to dig information out from the mud under a rock. Due diligence consists of detailing everything about the company from the backgrounds of the leadership team through the exit strategy. Normal due diligence consists of clearly detailing information about the management team, business strategies, sales and marketing strategies, market opportunity (and the company’s part of that), how revenue is made, products/services offered, current investors, liens, debt, financials and financial projections (5 year), customers, prospects, strategic alliances, competition, board and advisory board members, employees, intellectual property, challenges faced and the use of the investment funding.
The management team’s background is normally checked out for any criminal convictions or anything in their past that could be detrimental to the investment. What a well-built and well-thought out company wants to do is to supply this information upfront to the investor so that they have it available to make an informed decision. That doesn’t mean that they won’t do their own diligence in addition to the companies, but that information should parallel the company’s own.
Bottom line: Investors want you to weave a compelling story of how the company, with their investment, will be successful and make them lots of money.
In summary, be honest with your investors, appreciate the pain of doing the due diligence and understand that by doing investor due diligence, it will probably make you and the investment community understand more about your company and its future prospects.
During the past few years, entrepreneurs have continually asked me the question, “What due diligence is now required by angels and investment capitalists?” They want to supply the information and knowledge, but question what that consists of. Entrepreneurs are now more than ever cognizant of the need for advice and consultative support to find the right mix of diligence that is needed to position their company in the best but most honest spotlight of where it is at the current time.
In the 1990s, company due diligence was not as much of a challenge because the passion of the leadership team, the market opportunity and the idea sometimes overcame the actual comprehensive business checks that are now being completed by our sophisticated angel and venture capital communities. The 1990s were exhilarating times where the anticipation of huge profits on innovative ideas overwhelmed the actual doing diligence on whether the management, business strategy or market opportunity was actually there to make money.
Well, because of lessons learned, comprehensive company due diligence is back in fashion today and getting strong support by the venture community. Why? Investors are still smarting over large capital losses from not completing comprehensive due diligence during the 1990s. We learn from our experience and knowledge, but sometimes a bucket of cold water helps.
Let's get into the “Grit” of what is needed by today's sophisticated investor and let's do it by the numbers. Here are a few rules and suggestions to follow.=
First and foremost, with all your company due diligence, be honest. Show where the company is at the time of investment to the best of your knowledge. Please do not over amplify, do not hide or keep anything under the covers. Full disclosure is best and being honest about where you are at this point of time is crucial. Let the Investor determine where the chips may fall. Just provide all the information. I remember one client of mine that exaggerated their market opportunity significantly and their ability to capture most of it. The angel investor just did some simple Internet searches and found out some significant competitors that were well capitalized and probably would not let their market share erode without guerrilla warfare. The angel did not trust the company management after this was determined and just quietly moved on to the next opportunity. There is no second chance to gain trust and a strong partner.
Second, understand that company due diligence is not an easy process. It is painstakingly detailed, time consuming and challenging. Only the most passionate entrepreneur will complete it and succeed, noting that the end product will strengthen their chances for capital when competing against those who did not give it the same respect. The company will have to slice and dice their information many different ways before the process is completed, knowing that different investors see the opportunity in diverse ways.
It is best to be completely upfront with the investor and provide an easy format for him or her to see the business as they want to review it. Often I see the entrepreneur wants to portray the business as the entrepreneur wants to see it which is different from the investor. Bad idea. The entrepreneur does not hold the “money cards,” the investor does. Once the due diligence process is completed, the investor will want to see a strong, focused company that has all the elements of success written all over it. Remember: The seller wants you to buy the future. The buyer wants you to buy the past.
Third, understand the due diligence components the investors are looking for. They are looking at you to clearly “show them the money.” They don’t have time to dig information out from the mud under a rock. Due diligence consists of detailing everything about the company from the backgrounds of the leadership team through the exit strategy. Normal due diligence consists of clearly detailing information about the management team, business strategies, sales and marketing strategies, market opportunity (and the company’s part of that), how revenue is made, products/services offered, current investors, liens, debt, financials and financial projections (5 year), customers, prospects, strategic alliances, competition, board and advisory board members, employees, intellectual property, challenges faced and the use of the investment funding.
The management team’s background is normally checked out for any criminal convictions or anything in their past that could be detrimental to the investment. What a well-built and well-thought out company wants to do is to supply this information upfront to the investor so that they have it available to make an informed decision. That doesn’t mean that they won’t do their own diligence in addition to the companies, but that information should parallel the company’s own.
Bottom line: Investors want you to weave a compelling story of how the company, with their investment, will be successful and make them lots of money.
In summary, be honest with your investors, appreciate the pain of doing the due diligence and understand that by doing investor due diligence, it will probably make you and the investment community understand more about your company and its future prospects.
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