Marty Kaszubowski, Executive Director of the new Center for Enterprise Innovation, CRDF.

1. Getting Ready for
Due Diligence
Marty Kaszubowski
Old Dominion University
Institute for Innovation & Entrepreneurship

2. Time
Revenues
Seed Capital
(Friends/Family
& Angels)
Early Stage
(Angels &VCs) Later Stage
(VCs & Strategic
Partners)
Growth
Stage
(IPO,
Investment
Banks)
Valley of Death
Start-upVenture Financing

3. 1# 2#
3#
100#
First#Hits#
TM#
Hiring Poorly
Lack of Focus
Building something
nobody wants
4
#
5#
6#7#8#9#
#10
STARTUP MISTAKES
TOP 10
Score: 300
5. Not Having The Right
Co-Founders
36% of Tot.
Score: 153
18% of Tot.
Score: 112
13% of Tot.
Score: 98
12% of Tot.
Fail to execute
Sales & Marke ng
6. Chasing Investors,
Not Customers
7. Not Making Sure You
Have Enough Money
8. Spending Too
Much Money
9. Failing To Ask
For Help
10. Ignoring Social
Media
18 (2,1%)
12 (1,4%)
6 (0,7%)
66 (7,9%)
45 (5,4%)
28 (3,3%)
www.100FirstHits.com

4. Money CAN help you:
• Write more code
• Create prototypes
• Test products
• Acquire more sale leads
• Build a prettier website
• Allow your QA team to improve quality
• Give you time to make mistakes
• Get to market faster!!!
… Not all problems can be solved with money!!!

5. … Not all problems can be solved with money!!!
Money CAN'T help you:
• Know what code to write
• Know what prototypes to build and test
• Know how to convince customers to buy
• Know what your website should say or do
• Help you know when to ship the product
even though it’s not perfect
• Teach you how to learn from your mistakes

6.  Establish a legal entity
• Doesn’t need to be perfect, but it
needs to be flexible enough to allow
different kinds of “investment”
 Protect your Intellectual Property
• Doesn’t need to be a patent …Trade
Secrets are good, but need to be
documented
 Start building anAdvisory Board
• Industry and technical expertise
• Broad networks of relationships
 Have an MVP
 Know your customer segment
 Have a plan…
 Know (or guess…) your value
If you are
thinking
about
outside
investment

7. AND START BUILDING
RELATIONSHIPS!!!

9. The FiveThings Investors Have to See
Validated business model
Team that can deliver
MinimumViable Product (MVP)
Early sales traction and a pipeline
Partnerships for early scale

10. Typical Investment Criteria
ManagementTeam
Full-Time Commitment
Integrity
Passion
Coach-ability
Creativity
Record of High Achievement
Proprietary Advantage
Unique technology with defensible IP
Difficult-to-replicate business model
Scalability
Markets with big buying power
Potential to dominate market
Large-scale production & delivery
economics

11. Then you get the money

14. What we’re going to talk about ...
What “Due Diligence” is, and why it
matters to you now.
The different kinds of investors, and
what kind of information each will
investor type want to see.

15. What is “Due-Diligence?”
Once you have an investor interested in your company’s potential, you will
need to gather and present a wide range of information for him or her to
analyze before making a decision.
For the investor to be convinced he’s making a good investment decision,
he will be “diligent” in what information he considers
The result is a report that either recommends an investment or describes
why an investment is not warranted:
• Market Structure, Competition, and Marketing Strategy
• Technology Assessment
• ManagementTeam
• Operating Plan
• Financial Prospects

16. It’s not about risk …
… it’s about uncertainty.
Every investor understands that even well-planned ventures
have risks:
• The technology might not work
• The management team might make poor decisions
• The customers might not buy the product
Investors HATE uncertainty – they want to hear you say:
• “We’ve tested the technology and here are the results!”
• “We’ve run similar ventures before, and here are our
resumes!”
• “We’ve talked with potential customers, and here’s what
they told us!”

17. Certainty increases as the company matures
Embryonic Growth Mature Aging
Launch the
venture,
establish
competitive
position
Grow &
improve
competitive
position
Sustain
competitive
position
Abandon?
Venture Maturity
VenturePerformance
Source: Third Generation R&D, Roussel, Saad, & Erickson
Uncertainty
= 100%
Increasing
clarity
Executing a
known business
model

19. Your focus should be …
Do everything you can to reduce uncertainty!
“Certainty is the mother of quiet and repose, and
uncertainty the cause of variance and
contentions” -- Edward Coke

20. Different Information for Different Investors
The type and amount of information you’ll need to
gather and present will depend on how mature
your company is and the type of investor you
seek.
You should be open and honest about how you
plan to execute the business.
It is NOT your responsibility to tell the investor
what he should consider or how he should analyze
the information!

23. Types of DocumentsYou’ll Need
• Investor Pitch
Documents
• Organizational
Documents
• Management &
Organization
• Board of Directors
• Intellectual Property
• Legal Information
• Development Plans
• Products / Services
• Customers & Clients
• MaterialContracts
• Financial Information
• InformationTechnologies
• Environmental
• Contact Information

24. Due-Diligence FocusAreas
Market Structure, Competition,
and Marketing Strategy
Technology Assessment
ManagementTeam
Operating Plan
Financial Review

25. How important is each focus area?
Focus
Area
Friends &
Family
Angel
Investor
Strategic
Investors
Venture
Capital
Market
Structure
   
Technology
Assessment
   
Management
Team
   
Operating
Plan
   
Financial
Review
   

26. Let’s look at the
worst case
The following is a “Due-Diligence
Checklist” from aVenture Capital
(VC) firm in Washington, DC.
60-70 specific questions
Some questions might take 20-30
hours to answer completely
(Don’t worry, we won’t go
through them all in detail …)

27. Market Structure, Competition, and
Marketing Strategy
 To what market does this product service belong? What major
subgroups of services/products or customers exist in this market?
What is the size and growth rate of the relevant segment(s)?
 Who are the ultimate customers? Why will they (do they) buy the
product or service? Why would they switch from their current solution
to the company's product or service? What would stop them from
switching?
 How do suppliers reach the customers (advertising, direct sales, etc.)?
 Where does the company fit in the chain of production between raw
materials and the ultimate customer? What companies are
downstream and would motivate customers to buy from this
company? Will those key downstream companies agree to be
attentive distributors?
 Does the company plan to alter the supply chain? What evidence
exists that such a change is possible?

28.  At what stage is this market: (a) Pre-commercial; (b) Emerging; (c)
Growth; (d) Maturity ?
 What are the barriers to entry/exit of competitors? What prevents
new companies from entering the market? Who are the likely
entrants? What delays the exit of unsuccessful competitors?
 What means of promotion will be used? Will there be cross-promotion
with another product or company?
 How is the product sold (independent sales force, in-house sales,
etc.)? What is the length of the sales cycle?
 Who makes the purchase decision? Describe the decision process.
How will the company influence the decision?
 Is there seasonality in the decision to buy the product or service?
 What are the normal terms for payment? What is the provision for
customer service?
Market Structure, Competition, and
Marketing Strategy

29.  What incentives are offered to reseller, distributors, retailers, and the
like?
 What distribution channels are available?
 How influential are distributors, retailers, system integrators, training
organizations, and the like? How will the company influence them?
 Who are the competitors (current and likely entrants) and what
market share do they currently capture?
 What are the strengths and weaknesses of each competitor vis-à-vis
this company?
 How aggressively has each competitor responded in the past to new
entrants or competitor moves? What tactics has it used?
 How does each competitor try to maintain or improve its market
share?
Market Structure, Competition, and
Marketing Strategy

30. Technology Assessment
 What is the company's technological advantage?
 How important are the features offered by the advanced technology to customers?
 How easily can competitors copy or circumvent the technological advantage?
 What stage of maturity is the technology: (a) Idea Stage; (b) Proof of Concept; (c)
Prototypes Available; (d) Alpha Stage; (e) Beta Stage?
 What outside agencies have shown support for the technology (federal government,
state technology supporters, universities, etc.)? Why?
 What outside resources can be drawn upon to advance the technology?
 Have patents been issued or applied for? What do the patents cover that provide a
sustainable competitive advantage?
 Does the company have the means to defend their patents against infringements by
competitors?
 Have appropriate licenses been obtained for technology that is integral to the
product or service, but which does not belong to the company? What are the terms
(exclusive or non-exclusive, sunset clause, payment schedule?

31. Management Team
 Is there a well-researched and thoughtful Business Plan in place?
 Is every key manager and professional experienced enough to execute the Business
Plan?
 What deficiencies exist in the management team skills?
 How will the company recruit and retain key management talent?
 How does the management team compare to that of competitors?
 What motivates the management team?
 Has management returned wealth to investors previously?
 Have all key personnel signed non-compete agreements with the company? Do they
have any commitments with prior employers that limit their ability to perform for the
company?
 What does the Board of Directors/Advisors contribute to the company (advice,
money, market contacts, recruiting contacts, etc.)?
 How is the Board compensated?
 Do current investors present a cohesive and manageable group?
 Is there relative unanimity of vision amongst the management team, Board members,
and investors?

32. Operating Plan
 How large is the development team? Is the size representative of
industry norms?
 What arrangements are needed with suppliers and distributors? When
will they be in-place? Are there multiple suppliers and distributors?
 Does the proposed spending and staffing fit the marketing strategy?
 How will the company recruit and retain key marketing talent?
 Do the staffing levels for accounting/finance and Human Resources fit
industry norms given size and maturity of the company?
 What types of information systems does the company have? Do the
quality of the systems, and the size of the staff necessary to maintain
them fit with industry norms?

33. Start-up Milestone Description
Completion of concept
definition and initial product
testing
The company is able to articulate the combination of an identifiable market need and a product or
service that will meet that need that is technically possible and fundable through reasonable means.
Completion of prototype
product
A prototype product can be alpha-level software that establishes functionality on an appropriate
platform, or, in the case of engineered products, a breadboard-level system that shows the capabilities
in representative environment.
First financing First significant outside funding, (not counting “Friends, Family, and Fools” or small government
sources) from a sophisticated investor (Angel), vendor financing,VC, or other seed-stage source.
Completion of initial
production and operations
testing
Processes in place that indicate the product can be manufactured and delivered, and/or the service can
be delivered on time and with sufficient quality, etc.
Market testing Initial large-scale marketing of the product or service in advance of full scale production
Production start-up The point at which the market is sufficiently well understood to begin putting production processes in
place.
"Bellweather" sale The first time the company identifies a major target sale, mobilizes to address that target’s needs, and
captures the work. In other words, the first time significant revenue is generated through conscious
action and mature processes rather than dumb luck.
First competitive action The first time a competitor emerges and forces an action on the part of the client to retain a current
customer or compete for a new customer.
First major redesign or re-
direction
The first time, in response to either of a threat or an opportunity, the client undergoes a significant
redesign of current products and/or services, or develops new products or services that will
significantly enhance the current offerings.
First major price change The first time the company is forced to alter prices for existing products, and yet maintain quality and
functionality.

34. Financial Review
 Do the company’s financial projections (income statement, cash flow,
balance sheet, AR/AP) go far enough into the future to show a clear
path to profitability?
 Are the assumptions that underlie the financial projections clear,
concise, and reasonable ? Do they fit the operating plan?
 Do the projections ft with historical financial statements?
 Do the margins, growth rates and spending levels match those of
successful competitors?
 Are future funding requirements realistic and adequate to provide
proper margin for unforeseen needs?
 Will they occur after the company has reached an important
milestone?

35. But wait … There's more ...
 Corporate Summary Fact Sheet
 Business Plan
 Marketing Plan
 Key Personnel Resumes
 Financial Planning, Cash Flow Model, Analysis Reports
 Financial Statements
 Profit and Loss Statements
 Balance Sheets, IntercompanyTransfers
 Accounts Receivable / Accounts Payable Aging Summaries
 Tax Returns
 Asset Ledger
 Client List and Actual Sales
 Shareholder Statements
 Credit and Security Agreements
 Minute Book

36. … and more ...
 Summary of Litigation
 Non-Competition, Non-Solicitation, and Non-DisclosureAgreements
 License or Royalty Agreements
 Promissory Notes, Bonds, or Debentures
 Options or Rights for Capital Stock or CompanyAssets
 Partnership, JointVenture, or Marketing,Agreements
 Material Contracts andAgreements
 Cost SharingAgreements
 Contracts or Other Documents Affecting Assets
 Development orTechnologyAgreements and Documents Relating to Business Assets
 Corporate Policies (Insurance,Operational, Health, Safety, HR)
 Summary of Pending or ProposedAssessments orTax Liens
 Customer andVendor Contracts
 Listing of Sales and UseTax Returns (All Affected Jurisdictions)

37. A Final Thought …
Focus on reducing uncertainty:
• Emphasize how spending money will improve specific things that are
broken or missing only because money is lacking.
• For those things money can accelerate, show how well you’ve done
and describe how more money will bring more results.
For those things money can’t solve and which you haven’t mastered,
bring it up before the investors do and have a plan.
Show proof of your ability to learn, change, and improve.
If you don’t have a clear, plausible plan, don’t raise money yet.

38. A (final) FinalThought …
The bad versions of “No”:
The silent “No”: You submit a plan, make a call, have a meeting and …
nothing
The slow “No”: “This looks very interesting but we would like to see this,
this, this and that.”
The “Yes” that is really a “No”: “We are very interested, but not right
now because we are so busy. Can you come back in two months?
The good versions of “No”:
The clear and fast “No”:They look at your plan, have a meeting, and
quickly offer a specific reason for saying “no.”
The “No” in advance: “We don’t invest manufacturing”, “We only invest
in B2C”, “We only invested in a company that has been referred to us by
someone we trust.”

39. Are you ready for Due-Diligence?
Probably not, but don’t worry …
As your company matures you will:
• Generate the information needed to better
understand your market
• Create sophisticated products and services
• Build and manage a great team
• Implement world-class processes
• Create happy customers
And, when the time comes, you’ll be ready!