A Mindset that Prepares Startups to Succeed

Tom Walker

DUE DILIGENCE

Featured in The Metropreneur, April 2014

Capital Access Series #3

In theory there is no difference between theory and practice.

In practice there is.

– Yogi Berra

I’m a baseball fan. At this point in the

season, 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.