This article is the fifth 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.
Do you remember the first time you became excited about investing in an early stage technology company? You were impressed by the CEO and you loved the market opportunity. But, you knew you had to dig deep to find out whether there was a real winner in the making. So, you took a step back and started putting together a list of all the questions you had and the research you needed to do before making an investment. It felt a bit like being back in college and working on a major research paper. You were excited by the project, but daunted by the amount of work!
Even when you right-size the process and try to focus on the major issues, diligence can be a lot of work. It can be fun, and if you are trying to build a diversified portfolio of 10 or more investments and do all your own diligence, you are going to burn out long before you are diversified. Plus, you probably won’t do as good a job working on your own as you could if you had some help.
A team approach brings more hands, more eyes, more perspective and more expertise in areas where you may be less knowledgeable. Angel investors working together in groups address the biggest tension in early stage investing. This is the tension between the need to be diversified in this asset class to win, and the fact that, done right, each deal represents a lot of work. Properly constructed diligence teams are a perfect way to address this tension.
Ham, you formed and led a lot of diligence teams in your 15+ year angel career. What resources are you working with when forming a team? What is the deal lead’s role in putting the team together and making it work?
The very nature of a team means you are not working alone. Everyone on the team should have a well defined job. As the deal lead, it is your responsibility to divide up and delegate tasks based on the diligence checklist you put together. Your team should have people with applicable skills and knowledge in the areas that you need to research. If you don’t have the right skills internally, you might need to reach out into your group’s external network to find appropriate skills. For example, at Launchpad, we work with our attorney to help us on the occasional Intellectual Property review.
Once you have each of the key risk areas covered by one of your team members, the deal lead’s role evolves. Now, you own the ultimate responsibility for making sure things move forward in a smooth, timely fashion. This includes:
Gathering documents and important materials from the company
Making sure your team members are completing their assignments
Assembling the content and editing the final due diligence report
Keeping things on track and hitting your deadline for a final investment decision
Needless to say, a great deal lead tends to be an individual who likes to manage teams and projects. If that doesn’t fit your personal/work profile, you should probably reconsider whether you should be a deal lead.
What does it mean to be on a diligence team? What is a typical time commitment and set of expectations?
As a diligence team member, you will volunteer to take on a specific diligence assignment, such as customer reference checks or a competitive review. With a well defined task, your job is to assemble the appropriate information in a timely fashion.
During the diligence effort, the deal lead manages activities and requests with the entrepreneur to ensure professionalism and coordination. Each team member is expected to be responsive to other team members and timely with their deliverables.
Most diligence assignments are relatively specific and should be completed within a reasonable amount of time. Depending on the task, your work effort should fall within a range of 2 to 8 hours. For the entire diligence team, with everyone working in parallel, the typical diligence process can be completed in 20 to 40+ person hours of work. By working in parallel, a diligence team should be able to wrap up their assessment of the company and publish a report within a month.
How do you approach the question of tools? Is there special due diligence software you are supposed to use? Is there one proper way to produce the work product?
There are many ways to approach the question of tools to support the due diligence process. At Launchpad, we apply tools to all of our processes with the philosophy that you want to be pretty heavy on the tools in the beginning at the deal flow stage with a deal flow management system, and pretty heavy at the post-investment stage with a good portfolio management system, but you want to keep it pretty light and loose in the middle during diligence. We therefore apply tools in the following manner:
Deal Flow - We use a sophisticated content management system that helps us track our interactions with the hundreds of companies that apply to Launchpad every year. This system is well organized, supports a lot of different views into the data, and allows us to closely follow a company as it progresses from their initial application to our group all the way up to the due diligence stage.
Due Diligence - We deliberately allow our deal leads and diligence participants to use a collection of comfortable off-the-shelf, simple products to help manage diligence. All of the products (see below), are tools that most business people are familiar with, having used many of them for work or personal activities.
Portfolio Management - Once we invest in a company, we want to track that company as part of our overall portfolio. At Launchpad, and for our personal early stage portfolios, we use Seraf to stay on top of our investments, gain visibility, track performance, and report on our portfolio.
There are four types of tools that we make frequent use of during the due diligence process. All of these tools are free, web-based platforms. Some of these products have more full featured, paid subscriptions. So here’s what we recommend you put in place:
Deal Room - The Deal Lead should set up a shared folder in the cloud (e.g. DropBox but other cloud folders will work) and invite team members to the folder. Materials can be collected there for everyone’s reference.
Meeting Scheduler - Coordinating calendars for a group of individuals is never easy. You will need a meeting scheduler (e.g. Doodle, TimeBridge, NeedToMeet) to conduct scheduling polls to arrange meetings.
Conference Calls - Most meetings during the diligence process will be handled by conference call. You will need a conference calling service for this reason (e.g. UberConference, FreeConferenceCall).
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.