By guest authors Irina Patterson and Candice Arnold
Alan: That would be followed closely by the competitive advantage that the company has, particularly if it’s a sustainable competitive advantage, that would allow them to attack the market.
The stage of the company’s development . . . we generally do not look very seriously at pre-revenue companies any longer. We have in years past, but we learned the hard way that that’s not necessarily where we want to invest. So, the stage of the company’s development is certainly a factor.
Then you add in a whole bunch of deal stuff that goes into this. For instance, how much money do they need to raise? How much money do they need to raise total to get it to cash flow? And maybe even we’ll get to some deal terms. If they’ve got a unique investment structure that we wouldn’t be interested in, we’ll want to know if they’re flexible. If they’re not flexible, we’re out of there. Those are some of the key ones.
Again, I agree that is management to be sure. But there are also other factors and I think that leads with the market opportunity and the competitive advantage.
Irina: Who conducts your due diligence?
Alan: We form a team when a company makes a presentation and – I apologize if this sounds like a very structured process, it’s not nearly as structured as I’m saying – but when they make a presentation, volunteers from our membership or people whom we may reach out to within our group because of their industry expertise, will form a team. We will then develop an evaluation plan. We tend to call it evaluation rather due diligence. Due diligence is actually a subset of evaluating whether or not the company represents a good investment opportunity. Then that team – with me involved in all of them, all the teams – will manage the ongoing communication with the company to evaluate the company, do the due diligence on documentation, contracts, legal documents, and ultimately sit down and negotiate the investment terms.
When that team is done, the team then drafts a report with some attendant materials. It is forwarded to all of our partners and at the next available Springboard monthly meeting; the members then discuss it in depth and make a decision as to whether to make an investment. If the decision is to go forward with an investment, then we move into the final phase, which is getting the lawyers to paper the deal.
Simultaneously, we’re doing the internal add-on process that I described. Throughout the whole latter portion of the evaluation and due diligence, we’re also working on syndication because we syndicate every deal.
Irina: On average, how long does this process usually take?
Alan: Ninety days.
Irina: In the past twelve months, how many investments did you make?
Irina: That’s how many you make on average in a year?
Alan: For this fund, yes. For an earlier fund that was not the case. It was much more aggressive. Entrepreneurs kind of hate to hear this but frankly, from our perspective it is very difficult to find really promising investment opportunities. It is not an easy job. You would think with 300 companies approaching you every year it would be as easy as hell because you’ve got so many deals. No, that’s not the case.