For the entrepreneur, due diligence should be early and thorough: at the beginning of capital investment, while building the company, and at the end-game moment of sale. Yes, early and thorough, and not only at the moment of sale.
I want to continue our thinking here on due diligence – from the entrepreneur’s perspective.
I often conduct due diligence for my investor-clients (e.g., Sony, JP Morgan Capital) at the front end of an investment — when they are making early stage investment decisions. The diligence must be rigorous and it must be conducted by an expert(s) who knows the realities of the marketplace and the strategic needs of the investor. Then the investor can get an accurate risk assessment of the investment in that company at that moment in its market space, and understand what must be managed for the investment to succeed. CEOs should be ready with the expected information for such diligence during funding talks.
And I have done due diligence on the investors, for the entrepreneurs — completing 30 conversations in 24 hours with CEOs (from the list offered by the investors) on their experience with this investment group. In one case, this due diligence was so clarifying, that the early stage investors are still with the company 11 years later, and the strategic sale of that company in the hundreds of millions of dollars has just been announced. It is important to know your partners. My conversations with these CEOs who had worked with these investors revealed that we could count on these investors to stay with us for the long run. It was true.
And I have created the due diligence books for early stage clients in preparing them to sell their companies. The result is a series of large 3-inch ring binders of information on everything a buyer wants to know. The system I use answers more than 125 questions on your company. Often we have 15 such binders when we are ready for the buyers.
I once had to create these due diligence books from scratch in four weeks for a new client with three buyers at the door. Nothing had been gathered in the company’s three years, with technology and patents in the U.S. and abroad. It took me six weeks, plus a full time Administrator to do the leg work, plus 25% of a VP’s time. I directed strategy and traffic.
Strategy included my adding the critical information about what information could be seen at what stage of the due diligence process. These stages are “just looking,” after signing a binding letter of intent, and (finally) commitment from the buyers and our revealing of the trade secrets, This “staging” of information protects the company from releasing information to the buyers before they are committed in writing to the purchase, as some of them can be strategic competitors.
After that pressured experience, I began building the due diligence books when my early stage clients are beginning their first rounds of investment. I then continue to update the books, through rounds of financing and up to the time of sale and the buyer’s due diligence. This extra effort in the beginning keeps us much more prepared for receiving strategic alliance and capital, for next-round financing, and ultimate liquidity.
So, yes, entrepreneurs, commit to preparing your due diligence early, and make it thorough, whether the diligence is at the beginning or at the end.