This article is the ninth in an ongoing series on Deal Leadership. To learn more about leading a deal efficiently, download this free eBook today: Lead, Follow Or Get Out Of the Way -The Art and Science of Deal Leadership or purchase our books at Amazon.com.
If the business precept is true, that you “manage what you measure”, checking in on your team with regular checkpoints is key to a successful process. Over the years we have run into a series of surprises with diligence teams. Sometimes we discover diligence teams that turned out to be off drilling dozens of dry wells. Other times we have CEOs call on a Sunday afternoon very distressed about an interaction with a member of the diligence team. From these surprises we learned that you really need to stay on top of things since they can go haywire fast. Similarly, diligence can go nowhere fast. It is all too frequent a situation where you think a sub-team is working on something and on schedule with it only to find out they have not done anything yet. You manage what you measure...
As we’ve noted in this deal lead series, one of the biggest challenges in doing diligence reviews is knowing when to stop and when to press ahead. There are times when it takes discipline to keep going in the face of mounting issues, and there are times when it takes discipline to call a time-out despite accelerating deal momentum.
“It can be very discouraging to get into a diligence project and begin finding issues and realizing the story is not as complete and attractive as you first thought it was. The desire to quit the effort can be very seductive. Equally seductive is the desire to minimize late-breaking issues once you have put a ton of time and work into a deal. In both cases, allowing yourself to be seduced in the moment can lead to big mistakes. So you need a framework that builds in natural evaluation points or circuit breakers to give you the opportunity to reestablish your perspective and honestly review where you are relative to where you think you should be.”
The interim status call is just such a circuit-breaker. It forces people to collect their thoughts and assess where they are in a boiled-down fashion. It also keeps people moving. There is nothing like an approaching deadline for a public accounting of your progress to focus someone on a volunteer side project.
Christopher has been overseeing dozens of these calls each year for many years, so let's get some insights into how to make them work.
Christopher, when is the best time to have the first interim status call?
Diligence is all about momentum and getting things done before fatigue, boredom and other distractions overtake the project, so you want to have the first call as soon as you reasonably can. But there is little point in doing a call until people have had some time to do some work. So, assuming the company is responsive with information requests, I tend to aim for the end of the second week, or early in the third week. Regardless of when you actually place it, you need to publicize it ahead of time. The key is to put the call in the schedule early so people know it is coming and can self-manage to the deadline.
How is the call facilitated?
You’ve nominated a deal lead for a reason, so it is best to let him/her lead the call. If the diligence team and deal lead are part of an angel network with professional management, there is plenty of time for the group manager to speak up during the discussion, but the manager shouldn’t undermine its deal lead by monopolizing the call. A good manager will empower its deal lead by prepping together ahead of time and discussing goals and likely outcomes. But let the deal lead lead the call.
How long should the call be, and what are you trying to cover?
No one likes long conference calls, so every effort should be made to keep it to an hour. You have a lot of sub-teams to hear from, and they have to cover a lot of factual findings, and then you need time for some synthesis. So it takes active facilitating to keep the call to an hour. That is an important part of the prep.
A format that works well is to start by having the different sub-teams summarize their findings so far. Note they should be summarizing their findings, not their activities. Everybody knows they worked hard and did a lot. What people need to hear about is if they found anything of note.
Once all the sub-teams have a chance to summarize their findings, if there are things that are just not baked yet, they become priorities for further work. This will result in follow up calls for the relevant sub-teams, and the deal lead should make sure those teams have an action plan and a due date.
What do you do if you find a major yellow flag or diligence concern?
First of all, the deal lead should take the temperature of the group and see how people feel about the issue. Some items like entrepreneur integrity are going to be an absolute “game over” issue. Other items, like a serious competitor or a much less robust product than anticipated, are going to be a judgement call. So it is valuable for the deal lead to gather other people’s reactions and not jump to their own conclusion. If it is not a show-stopper, then the focus should be on what additional work needs to be done in order to gauge the impact of this and put it into the proper perspective in the diligence report. If it is something that would likely stop the average investor from investing, then it is probably time to blow the whistle. For more on that, see Cutting Bait: When To Walk Away and Stones Unturned: An Investor's Guide to Due Diligence in Early Stage Companies.
If everything is going well, what is the next step?
Invariably one of the sub-teams is behind schedule or not done with their work or not available. Even in positive situations, there is more work to do before starting to draft the diligence report sections. Some sub-teams may be close to ready, so you can get the process started for them.
With the other teams it is more about agreeing on what steps they will take, what information they will gather, and what questions they will answer. The important part is to keep the team focused on the looming deliverable - their report section. This is not only key to getting reports done on time, it is key to making the process feel concrete and manageable to the participants. You can have the sub-teams that are in good shape take a first cut at their report section and invite them to share a draft with you for comment. With the sub-teams still contending with information gaps, you can talk to them about what specific information or analysis they think they will need before they can begin tackling their section.
So it sounds like you may be starting the report drafting process at this point? How do you kick this off?
We are big believers in a very structured report template and all of our investors are familiar with it. So the teams mostly know what they are trying to accomplish with their section. There are three ways a deal lead can tackle report-building:
Email everyone a copy of the template and say “fill out your section”. Then the deal lead manually assembles it him or herself.
Put the template on Google Docs, share the link and tell people to log in and fill in their section.
Ask people to write unstructured memos on their findings and conclusions in their area. Then the deal lead assembles the final report.
There are pros and cons with each approach. Emailing a word document of the template is familiar and easy for everyone, but it can lead to a version control mess and a lot of email searching to find the right draft (“no, you used the one I sent at 10:10am on Tuesday, but I sent a later one in the same thread at 2:15pm. You should have used that one!”).
Allowing everyone to create their own free form mini-memo shares the same familiarity and also the same version control issues. It also introduces the new problem of verbosity. The deal lead is going to have a ton of work editing a five page memo down to three paragraphs without changing the meaning or emphasis. The only good thing I can say about that approach is that sometimes the longer memo is nice to have in the supplemental files for investors who want to go deeper into a subject than the summary diligence report. The reality is that many “authors” have trouble going straight from a mass of unstructured notes and facts right to a tight couple of paragraphs, and will need the interim memo stage to help them organize their thoughts. So I don’t discourage the practice, I just insist that they are not “done” when they give me a three page memo. They also have to give me the three paragraph version.
In my experience, sharing a Google Docs version of the template that can serve as a shared workspace and canonical version of the report is really the most efficient way to go about it. People can see each other’s work and be guided and spurred on by the progress others are making, and they can be guided by the template. The deal lead can see exactly where each sub-team is at all times. And, the deal lead never has to be the version control manager or editor or file wrangler. They can say, “I’ve looked at your draft section, and I made some edits in redline” or “I like what you have but I need you to make it much shorter.”
The only disadvantage with Google Docs is that some people are not as familiar with the tool and may have issues with losing their password, not finding a menu or command, or pasting their text into the document in gigantic purple letters (grin). And there is also the possibility that someone could put their elbow on their keyboard, select a lot of text and then delete a chunk of someone else’s work. Google Docs does have version control so it is possible to roll-back in case that happens. Work will likely be lost if more than one person happens to be working right at the same time and you need to roll back to an earlier version. It’s a rare issue, and worth the risk in my view. Plus, it can be mitigated by the proactive downloading and saving of copies by the deal lead or individual authors during the most active report writing times. We advise our deal leads to leave the document open in a browser tab and and download archival copies pretty regularly just for peace of mind.
If it is trending positive, do you communicate that to the company at this point?
The deal lead and the group manager should talk about that and approach it with caution. As we outlined in Grist For The Mill: Gathering Data for Diligence, you need to be careful not to get ahead of the final conclusion of the team. You need to be really sure you are done and coming out with a “go forward” recommendation. In a surprising number of cases, even when things start out looking positive, late-breaking issues can crop up and derail a diligence effort. This is especially true of blind reference checks and customer calls which tend to happen later in the process.
So it is important to be very careful in talking to the company and to potential members of the syndicate too early. The company in particular will be listening for what they want to hear and it is very easy to get into a sticky situation where you have to surprise a team with new information that contradicts previous information.
That said, at some point, usually after a second check-in call or when most of the due diligence sections exist in draft form and things look good enough, it makes sense to start talking to the company about the termsheet negotiation and setting a deadline for completion of the project.
Want to learn more about leading a deal efficiently? Download this free eBook today Lead, Follow Or Get Out Of the Way -The Art and Science of Deal Leadership or purchase our books at Amazon.com.