4/52: The company you keep

#CapitalAtRisk

Above: The Company by John Micklethwait & Adrian Wooldridge

The 2010s was the decade of the Entrepreneur. The 2020s will be the decade of the Investor.

“It is far better to be alone, than to be in bad company”

George Washington

Required carefulness

What due diligence (DD) will you do on a deal?

No one really gets excited about doing DD but I find parts of it fascinating! I might uncover a small lie but if I keep pulling at that thread much more is revealed. Or I might find the hidden driver of the business or founder — the thing, that perhaps not even they knew, that sets them apart.

I also see DD as detective work. Start with broad questions then bit by bit narrow in to see if they’re really on top of the detail. It’s remarkable, at least to me, that some founders can’t remember *exactly* where and how they met their co-founder or describe the scene when they came up with their idea for the business.

In terms of DD material that I like to see (in a ‘Data Room’ if you want to call it that), here’s what I typically ask for:

• Cap table

• Fund raising history

• Shareholders’ Agreement (SHA) and Articles of Association

• Key contracts

• 10-slide investor deck

• One-pager

• Use of funds

• Team information

• Financial targets

• Financial history

• Proof of S/EIS eligibility

I’m all set up with Google and, given the choice, would prefer a Google Drive link — I’ve never really got on with DropBox — but that doesn’t really matter, I’ll work with whatever system the founder has however if it’s too complicated or they make it more difficult than it needs to be that’s a signal. DD is sharing a bunch of documents, these things should be easy.

Having said that, from the founder’s point of view the DD process will never be perfect and it might feel, no matter the stage of the company, that they’re forever on the back foot. That’s because the DD for their friends & family round won’t be sufficient for the seed round, and that DD won’t be sufficient for the Series A, etc, etc.

Founders can get ahead of this by over-preparing. If everyone thinks DD is a pain to do then how about a founder who thinks how it could actually be a delight to do, what would that look like? One example of this is when I asked ‘Founder1’ for their DD and they said, “Sure, I’ll get that together”, then it took two weeks and didn’t have everything I asked for Vs ‘Founder2’ who replied immediately with a Google Drive link to the information I asked for and more besides.

Below I’ll go through each piece of DD I ask for and tell you why I ask for it and what I’m really looking for…