Executing The Due Diligence Plan (Eugene D. Hill)

Executing the
Due Diligence Plan

Eugene D. Hill, III
SV Life Sciences Advisers LLC
Kauffman Fellows Program

October 21, 2013
1
The Substance
Key Issues
The Market
The Management
The Method
The Money
The Metrics
Venture Capital Deal Flow
Business Plans Received
Projects
Evaluated
Projects Funded
3
Key Triage Factors

Management Pedigree
Deal Source
Process Management
Customer Validation
Adherence to Plan
Key Focus Areas

Major Risk Factors
Obvious Show Stoppers
Better, Faster, Cheaper, or Brave New World
Major Risk Factors

Technological
Market
Regulatory
Operational
Financing
Market
Macro
Size
Economics (Pricing, Operating Margins)
Growth Rate
Customers
Concentration
Segmentation
Barriers to Enter
Micro
Methodology
Business Model
Value Proposition
Distribution Strategy
Competitive Differentiation
Growth Strategy
Technology
Management
Vision
Experience (Quality, Quantity, Relevancy)
Education
Track Record
Capability
Money
Financial Strategy
Capital Requirements
Structure
Valuation
Liquidity Path
Use of Proceeds
10
Numbers
Income Statement
Revenue Projections ($, Units, Average Sale Price)
Expense Projections (Head Count, Salary Level, Corporate Overhead)
Margins (Gross, Operating)
Balance Sheet
Cash
Accounts Receivable
Inventory
Goodwill/Intangibles
Debt
Liabilities
11
Cash Flow
Operating
Financing
Budget
Capitalization Table
Investors
Management
Option Pool
12
The Process
Business Plan Review
Management Presentation
Site Visit(s)
References
Competitive Analysis
Financial Analysis
Corporate Review
The Deal
13
Business Plan Review

Form
Substance
Vision
Business Model
Marketing Plan
Technology Plan
Financial Plan
14
Venture Capital Glossary

What We/They say
and What We/They Really Mean
Acquisition Strategy
the current products have no market
Basically on plan
revenue shortfall of 25 percent
Dotcom business model
potentially bigger fools have been identified
Considerably ahead of plan
hit plan in one of the last three months
Currently revisiting the budget
financial plan is in total chaos
Cyclical industry
posted a huge loss last year
Entrepreneurial CEO
totally uncontrollable, bordering on maniacal
Ingredients are there
given two years we might find a workable strategy
Investing heavily in R&D
trying desperately to catch the competition
Limited downside
it cant get much worse
15
15
Venture Capital Glossary...

What We/They say
and What We/They Really Mean
Long selling cycle
yet to find a customer who likes the product
On a manufacturing learning curve
cant make the product with positive margins
Possibility of a slight shortfall
a revenue shortfall of 50 percent
Repositioning the business
multimillion-dollar investment recently written off
Somewhat below the plan
revenue shortfall of 75 percent
Too early to tell
results to date have been grim
Turnaround opportunity
lost cause
Unique
no more than six competitors
Upgrading the management team
the organization is in complete disarray
Window of opportunity
without more money, the company is dead
Work closely with the management
talk to them on the phone once a month
16
16
Pipeline Qualification
Suspect:
A potential Prospect
Prospect:
A Suspect with whom contact has

been made
Qualified Prospect: A potential Customer with budget

actively seeking a solution
Customer:
17
A contractually committed
financially viable client
Technology Review
Technology
Architecture (web-enabled or web-centric) thick
versus thin client
Operating System
Relational Database
Application Code
Development Environment
18
Technology Review (continued)

Resources
Budget
Cap Ex
Development
Operating
Maintenance
Staff
External
Internal
19

Track Record
Finance
Development
Experience
20

Function
Publish
Interact
Transact
Transform
21

Development Semantics
Pre-alpha
A concept in someones mind
Alpha
Works only in development laboratory
Beta
Installed in production environment, partial
feature/function complete
First Customer Release

Debugged, defined feature/function shipping to
paying customers
22
Management Presentation
Articulation
Cogent Strategy
23
Site Visit
Headquarters
Outlets
First Impression
Organizational Culture
24
References
25
Management:
Former employer(s), bosses,

peers, direct reports, board
members, advisors, competitors,
analysts
Customers:
Current, former, prospective
Company:
Auditor, legal, bank, investors
Competitive Analysis
Market Share
Mind Share
Momentum
Differentiation
Buyer Motivation - Painkiller or Vitamin?
Sales Cycle
Pricing
26
Financial Analysis
Actual vs. Plan
Sales Pipeline
Leverage (Operating, Financial)
Competition (Margin, R&D, Distribution, ASP,
Corporate)
Valuation
Return ($, IRR)
27
Corporate Review
Audit and Management Letter
Legal (Lawsuits, Licensing, Agreements, Distribution

Agreements, Employee Agreements, Employee Benefits,
Shareholder Agreements, Stock Options, Financing
Agreements, Stock Ledger, Customer Contracts, etc.)
Regulatory (Licenses, FDA, Environmental)
Intellectual Property (Patents, Copyrights,
Trademarks)
Insurance (Liability, Key Man, D&O, E&O)
Leases (Real Estate, Capital Equipment)

28
The Deal
Term Sheet
Legal Representation
Document Preparation
Closing
Post-Closing Review
29
Tips
Dos:
Conduct site visits of corporate and regional offices
arrive early
Tour with junior (non-management) staff
Meet with worker bees
See production environment
Ask lots of questions

Obtain prior round business plan (if applicable)
30
Tips
Donts:
Mistake development for production
Visit only corporate site and staff
Discuss anything in elevators or bathrooms
Leave your files unattended
Sign the visitor log
Lead the witness
Volunteer competitive information
Breach moral/written obligation of confidentiality
Assume you can structure your way to a good investment
Invest in haste or you can repent at leisure
31
Human Capital Assessment

Venture Techniques
Art Critic
Sponge
Prosecutor
Airline Captain
32
Management Orientation
Missionary
Mercenary
33
Cognitive Traps
Availability Bias
Contamination Effect
Hindsight Bias
Heuristic Affect
Induction Problem
Scope Neglect
Conjunction Fallacy
Calibration Overconfidence
Confirmation Bias
Bystander Apathy
Source: The Ascent of Money, Niall Ferguson

34

Executing The Due Diligence Plan (Eugene D. Hill)

Uploaded by

Copyright:

Available Formats

Executing The Due Diligence Plan (Eugene D. Hill)

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Executing The Due Diligence Plan (Eugene D. Hill)

Uploaded by

Copyright:

Available Formats

Executing the

Due Diligence Plan

Kauffman Fellows Program

Venture Capital Deal Flow

Business Plans Received

Key Triage Factors

Key Focus Areas

Major Risk Factors

Economics (Pricing, Operating Margins)

Business Plan Review

Venture Capital Glossary

and What We/They Really Mean

the current products have no market

revenue shortfall of 25 percent

Dotcom business model

potentially bigger fools have been identified

Considerably ahead of plan

hit plan in one of the last three months

Currently revisiting the budget

financial plan is in total chaos

posted a huge loss last year

totally uncontrollable, bordering on maniacal

Ingredients are there

given two years we might find a workable strategy

Investing heavily in R&D

trying desperately to catch the competition

it cant get much worse

Venture Capital Glossary...

and What We/They Really Mean

Long selling cycle

yet to find a customer who likes the product

On a manufacturing learning curve

cant make the product with positive margins

Possibility of a slight shortfall

a revenue shortfall of 50 percent

Repositioning the business

multimillion-dollar investment recently written off

Somewhat below the plan

revenue shortfall of 75 percent

Too early to tell

results to date have been grim

no more than six competitors

Upgrading the management team

the organization is in complete disarray

without more money, the company is dead

Work closely with the management

talk to them on the phone once a month

A Suspect with whom contact has

Qualified Prospect: A potential Customer with budget

Technology Review (continued)

Technology Review (continued)

Technology Review (continued)

Technology Review (continued)

First Customer Release

Former employer(s), bosses,

Current, former, prospective

Auditor, legal, bank, investors

Legal (Lawsuits, Licensing, Agreements, Distribution