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TRANSCRIPT
© Zühlke 2019Slide 1| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Key Aspects of Due Diligence
© Zühlke 2019Slide 2| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
What is Due Diligence?
© Zühlke 2019Slide 4| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Elements of Due Diligence
Exploratory Phase
Terms
Deep Dive
Contracts & Closing
© Zühlke 2019Slide 5| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Try to Understand the Needs of Your (Potential) Investors
Are you and your investor a match?
• Industry Focus
• Investment Stage Focus
• Return Strategy
• Expected Return on Capital
• Source of Funds
Is there a match with the Startup’s needs?
© Zühlke 2019Slide 6| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Team
© Zühlke 2019Slide 7| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Conflict Ability
© Zühlke 2019Slide 8| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Trust
© Zühlke 2019Slide 9| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Responsibility
© Zühlke 2019Slide 10| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Commitment
© Zühlke 2019Slide 11| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
“If there is any one secret of success, it lies in the ability to get the other person’s point of view and see things from that person’s angle as well as from your own.”
Henry Ford
Ability to Learn
© Zühlke 2019Slide 12| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Team Spirit
Team
• Conflict Ability
• Trust
• Responsibility
• Commitment
• Ability to Learn
© Zühlke 2019Slide 13| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Management Team Assessment
Team
• Are key positions staffed adequately?
• Team cohesion?
How did the founders meet/choose one another
How were non-founder team members attracted
• Is there passion?
• Commitment enhancers:
Personal investment
Attractive remuneration/incentive plan
• How are decisions taken?
© Zühlke 2019Slide 14| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
TeamKey Positions
• Strategy (Board, Mgmt)
• CEO
• Product Management
• Regulatory & Quality control
Pathway
Clinical Aspects
Design Control
• Product Development
• Corporate Marketing
Network
Negotiation experience
• Supply
© Zühlke 2019Slide 15| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Business Strategy
© Zühlke 2019Slide 16| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Assumption Fact
© Zühlke 2019Slide 17| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
© Zühlke 2019Slide 18| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
“When you are studying any matter, or any philosophy, ask yourself only, what are the facts, and what is the truth that the facts bear out.Never let yourself be diverted by what you wish to believeor by what you think would have beneficent […] effects if it were believed.”
Bertrand Russel, 1959
© Zühlke 2019Slide 19| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
How big is the cake?
© Zühlke 2019Slide 20| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
How big is your slice?
© Zühlke 2019Slide 21| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Corporates
© Zühlke 2019Slide 22| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
© Zühlke 2019Slide 23| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Business StrategyTop Level Questions
• Market Definition (the cake)
Is it an existing cake or a potential cake that needs to be baked?
• Market Potential
Is the cake large enough to get the investor’s money back?
• Business Strategy
What slice of the cake can you secure and…
How do you do it?
• Are there corporates that are interested in a slice of this particular cake?
• What makes it a winning strategy?
Look at the market forces from an inside-out and outside-in view
Market Potential ≠ Potential Market
© Zühlke 2019Slide 24| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Business StrategyProduct Definition
• Who
needs/wants the product?
pays for the product?
uses the product?
• Why will customers buy?
Product Feature ≠ Customer Benefit ≠ Value
• How are you making the product
make vs. buy
working capital
• How are you distributing the product?
• When and how are you generating revenue?
Business Model
• Value chain to the end-customer
Where are the attractive positions?
Where are you?
© Zühlke 2019Slide 25| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Business StrategyIntellectual Property (IP)
Freedom to Operate Analysis
• Continuous screening of third party IP (never ever ever stops)
• Used to understand if a third party could force you out of business with a litigation (“their IP”)
IP Protection
• Patents and their applications, Trademarks, Web-Addresses, …
• Cost factor
• Used to understand if you can prevent a third party doing business with your IP
• Note: a patent requires the detailed description of your IP publicly
© Zühlke 2019Slide 26| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Execution
© Zühlke 2019Slide 27| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
“[…] after I left John Sculley got a very serious disease. It’s the disease of thinking that a really great idea is 90% of the work. And if you just tell all these other people “here’s this great idea,” then of course they can go off and make it happen. And the problem with that is that there’s just a tremendous amount of craftsmanship in between a great idea and a great product.”
Robert X. Cringely’s 1995 interview with Steve Jobs
© Zühlke 2019Slide 28| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Driven by a Team and Its Own Plan
Execution
The plan should:
• be a logic consequence of the business strategy
• be risk driven
discover weaknesses in your strategy and/or execution plan as early as possible
• contain milestones
regularly reassess your strategy/execution plan
• make your funding needs transparent
© Zühlke 2019Slide 29| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Streams of an Execution Plan
Execution
An execution plan is a project plan including following streams (possibly more as well)
• Product marketing (what do you do to understand your customer and define your product? MVP, short validation cycles)
• Company marketing (when do you talk to which corporate, how to you achieve a bidding situation for your company?)
• Product (Research and) Development (what do you do to bring your technology to the distribution channels?)
• Pre-Clinical, clinical requirements (independent or as part of R&D Plan)
• Supply, distribution and sales
© Zühlke 2019Slide 30| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Financials
Execution
• Founders should be proactive to familiarise with basic corporate finance
• Cash flow, Balance Sheet, Profit and Loss
• The funding need should correlate with the execution plan …
• … and make sure assumptions are transparent
Order Booking to Delivery Invoice [days]
Supplier Cash paid after Order [days]
Exec Salaries + Charges
Employees Salaries + Charges
Notice periods
…..
© Zühlke 2019Slide 31| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Financials
Execution
• Ideally your financing rounds are correlated with company value inflection points (such as Technology Proven, First in Human, etc…)
• Revenues are very hard to predict, especially when they are several years ahead. You need to find a balance between healthy aggressiveness and unrealistic fantasy…
• In Startups founded by Tech-Teams, Product Marketing efforts are very often very underestimated (so is Company Marketing)
• Venture Investors often do not like to invest capital for working capital
© Zühlke 2019Slide 32| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Terms and Contracts
© Zühlke 2019Slide 33| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Terms and ContractsSome Terms You Will Come Across
• Number of shares, share prize (valuation)
• Board of Directors
• Liquidation Preference
• Information rights
• Share Transfer
Right of First Refusal
Drag Along
Tag Along
For clarification: Term Sheet is a basis for negotiation, from which follow:
• Investment Agreement
• Shareholder Agreement
• Articles of Association
• Organisational Regulation
© Zühlke 2019Slide 34| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Terms and ContractsFormal Due Diligence: A Non Exhaustive List
• Financials
Audited/Unaudited
• Corporate Law Matters
Commercial Register
Articles of Assoc., Orga. Regul.
Minutes (Shareholder Meetings, Board Meetings, …)
• Securities
Stock, Convertibles, Options, Warrants
Shareholder Agreement
Share Ledger
• Employee Matters
Employment Agreements
ESOP
Overtime Remuneration
Vacation not taken
• Insurances
• Litigation
• Taxes
• Agreements
Leases, Customers, Licenses
© Zühlke 2019Slide 35| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Pitching
© Zühlke 2019Slide 36| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
7 Listeners Pains You Want to Avoid in a Pitch
My 2 Cents on Pitching
• Stuff they don’t understand immediately
• Stuff that makes them shake their head instead of nod
• Stuff they’re unsure if it’s a validated fact or an assumption / projection
• Inconsistent stuff
• Typos, errors
• Unpreparedness• A massive amount of microscopic text
© Zühlke 2019Slide 37| |Stephan WehrliKey Aspects of Due Diligence 14/05/2019 Public |
Stephan WehrliInvestment Principal+41 43 216 [email protected]://www.linkedin.com/in/stephanwehrli/
”In the corporate world, if you have analysts, due diligence, and no horse sense, you've just described hell.”
Charlie Munger