As the startup proceeds through the due diligence process related to a potential investment from an angel group, VC or Corporate VC, (CVC), the process will include discussions and reference checks
with a broad base of the start-ups’ constituents. The purpose of these discussions begins with validation but ultimately includes the potential of the opportunity they have in funding your startup.
- Key Management Team Members – The initial discussions are likely to be conducted with the founders and key members of the startup’s management team. The investors will desire to frame the team by understanding what each of the players bring to the opportunity by learning more about their backgrounds and experience, their philosophies and their approaches to the business. Based on these discussions, they will make an assessment of the team’s strengths, weaknesses and potential resulting gaps of knowledge, experience and networking infrastructure. Simultaneously, the investor will be seeking to better understand each team member’s character, in order to assess the ultimate question; “Will the team be able to execute?”
- Personal References for Key Management Personnel – Investors will desire to talk with the entrepreneurs’ references early in the process. They seek to validate what they have already learned. Such validation is anticipated. If it does not occur or should the endorsement be weak, bright yellow and possibly red flags appear. They also seek to obtain third party perspectives as to the character of the team member and their ability to execute.
- Professional Partners – CPAs, Commercial and IP Attorney’s work closely with the typical startup and as a result know the startup well. While the investor expects that such professionals shall be generally supportive of the startup entrepreneur, since such entrepreneurs are their clients, discussions with such professionals are important to the validation process, especially as it relates to regulatory issues.
- Suppliers – Validation of the company’s cost of critical components and indebtedness, or lack thereof, are important issues addressed by investors. Should the company’s product be in the prototype stage, such discussions also support the prototype’s potential related to the timing, product quality and scale anticipated.
- Customers – Validation of the relationship and of sales to a customer are important. However, validation of a strong relationship between the startup and the customer, a commitment of customer service, of the startup team listening and working with the customer to improve the product and of the customer’s intent to remain a client of the startup are paramount.
- Advisory Board Members – Many entrepreneurs expect that advisory board members with high name recognition will increase the comfort of the investor and their confidence in the company as an investment option. However, the level of engagement of the advisor and the willingness of both the advisor and the entrepreneur to discuss pertinent issues is of far higher value to the angel, VC and CVC investor.
- Members of Your Board of Directors – Most entrepreneurs in the early stages will not have large boards with multiple independent, outside directors. However, should the startup have such a director, their level of enthusiasm toward the company and their feedback related to the coach-ability of the founders and management team will be critical.
- Current Investors – Existing third party investors are a valuable portal for future investors as they can provide perspective concerning the management teams’ history of attaining its milestones, the coach-ability of the management team and their continued confidence or lack thereof in the team and the opportunity as evidenced by their enthusiasm for a follow-on investment.
- Other Investors Participating in the Current Round – Other third party investors in the existing round can also provide perspective as they complete their due diligence and assess their view of the strengths, weaknesses and risks related to the opportunity.
Finally, the founders should expect the investors to request formal Background Checks of all key members of the management team before funding your startup. Should the entrepreneur expect that there is something in his background that might be of concern to the investors; they should share it up front. If the angel group, VC or CVC learn of it after the fact as a result of their investigation, the confidence levels developed through a successful due diligence process will likely be shattered, as will the opportunity for investment from that organization.
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