Due Diligence: A Mindset that Prepares Startups to SucceedCapital Access — By Tom Walker on April 2, 2014 at 8:00 am
“In theory there is no difference between theory and practice. In practice there is.” – Yogi Berra
I’m a baseball fan. After this seemingly endless winter, it was so great to finally reach Opening Day.
As I was watching clips from some of the games, it hit me that baseball and entrepreneurship share something in common: there’s a lot of practice relative to the amount of actual play.
The most critical seconds of baseball occur when a player interacts with the ball. The rest of the time they are alert and on their game, but essentially whether on the field or in the dugout, players spend most of any baseball game waiting for the ball.
And the reality is that (excluding pitchers and catchers) in a nine-inning game, most players don’t get the chance to interact with the ball all that many times.
It’s the same with entrepreneurs raising investment capital. There’s a lot of preparation, but you just don’t get that many opportunities with potential investors to pitch, hit or catch the ball. When those moments do come your way, you can’t afford to make a mistake.
Career greats like Barry Larkin or Jim Thome spend thousands of practice hours to prepare for game-changing moments inside the lines.
And that’s another thing that baseball and entrepreneurship have in common: you have to practice off the field the way you want to play, which brings us to the topic of due diligence.
Investopedia defines due diligence as the investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.
When you get this type of opportunity to demonstrate that your company is investment worthy, you want to be prepared, and that doesn’t happen overnight.
That’s why anticipating and preparing for due diligence from the very beginning of your company’s life, long before you start talking with investors, is a smart strategy. Here are some tips to help you get prepared.
- • Accept that due diligence is a good thing for everyone involved. It’s a way of preventing unnecessary harm to either party involved in a transaction.
- • Become familiar with the typical information you will be asked to provide. The Angel Resource Institute provides a number of due diligence tools.
- • After you gain a preliminary understanding of what’s involved in due diligence, seek out a knowledgeable source to talk it through. TechColumbus can be a great resource.
- • Learn to look at any contract or agreement through the eyes of a potential investor before you sign. Harmful pre-existing agreements have derailed many deals.
- • Organize all information that pertains to licenses or intellectual property. The company may have completely protected IP. There may be agreements pending, or rights and permissions may be a long way from being finalized. As the company manages through these issues, preserve the record of the steps you took.
- • Create an online due diligence room. Put an electronic version of every legal document, every version of the cap table, every contract with a supplier or a customer here. The goal is to make the process of storing documents as automatic as locking the door at night so that when the time comes, you can respond to investors rapidly. Investors aren’t impressed by management teams that are sloppy, disorganized or take too long to respond.
- • Assessing the entrepreneur and management team is an important part of due diligence. Any whiff of bad ethics or questionable character traits will halt the deal. There will always be personal background checks of the entrepreneur and management team.
- • Due diligence is the beginning of one of the most important relationships the entrepreneur and startup will have. It’s an opportunity to build mutual respect and rapport.
Entrepreneurs who recognize and understand what will be required during due diligence establish processes inside their companies that produce more efficient and effective operations.
It’s the perfect opportunity to practice like you want to play.