Due Diligence

Texas Open Angel NetworkAugust 28, 2012

Kevin Castello

Definition of 'Due Diligence - DD'1. An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale.

2. Generally, due diligence refers to the care a reasonable person should take before entering into an agreement or a transaction with another party.

Read More: http://www.investopedia.com/terms/d/duediligence.asp#ixzz24qNuxEE3

Practical DD Definition

Whatever the investor does prior to making an investment decision.

Does DD make a difference?

Kaufmann Foundation 2007 Study “Return to Angel Investors in Groups” by Dr. Rob Wiltbank

Return multiple for DD < 20 hours 1.1x in 3.4 yearsReturn multiple for DD >20 hours 5.9x in 4.1 years

2009 Follow-up Study in UK by Dr. Wiltbank

Returns <20 Hours >20 Hours< 1X 60% 40%1X-5X 30% 37%5X-10X 5% 8%10X-30X 0% 12%>30X 5% 3%

(all percentages are approximates)

DD Process Overview

• Quantitative Analysis• Qualitative Analysis• Management Team Analysis• Additional “Deep Dive” Analysis• Term sheet negotiation if applicable

Quantitative Analysis

• Documentation review that supports the authenticity of the startup

• Duration: days to weeks mainly dependent upon entrepreneur responsiveness

• Deliverable: Completed comprehensive checklist

Qualitative Analysis

• Angels and subject matter experts to gather more details of the business through a question and answer session with the company’s management team.

• Duration: days to weeks• Deliverable: Report of findings and opinions of a

subject matter expert

Management Team Analysis

• Discovering the strengths and weaknesses of the management team and begin building an Advisory Board or Board of Directors as applicable

• Duration: days to weeks• Deliverable: Background check reports and report of

other findings and recommendations

Deep Dive Analysis

• Fact finding or research if the Angels feel that additional information is necessary to validate the investment

• Duration: days to weeks• Deliverable: Report with findings and

recommendations

Term Sheet & Closing

• Duration: days to weeks• Deliverable: Term sheet • Closing Documents & Funding Event

Questions & Discussion