How To Prepare Your New Venture For Investor Scrutiny

due-diligence-InvestorsFor the elite startups and entrepreneurs who manage to attract the investor they dream of, and survive the term sheet negotiation, there is still one more hurdle before the money is in the bank. This is the mysterious and dreaded due diligence process, which can kill the whole deal. In reality, it is nothing more than a final integrity check on all aspects of the business and the team.

Some entrepreneurs do very little to prepare for due diligence, assuming all the talking has already been done, and the business plan and results to-date tell the right story. Others schedule exhaustive training sessions for everyone on the team, including showcase customers, to make sure that everyone paints a consistent picture. My best advice is to stick to the middle ground.

The Founder needs to remember that meetings up to this point have been primarily off-site, with staged demos, and managed personally by the CEO or a small team. Due diligence always involves on-site visits, informal discussions with any or all members of the team, vendors, and good customers as well as bad.

If there are conflicts within the team, or differing views of the strategy, or evidence of missing processes and tools, the investment process will likely be terminated. Even if the entrepreneur feels that all is well, it’s well worth the effort to prepare with the following actions:

  1. Make sure the whole team is up-to-date on the plan. That might start with the CEO giving the investor pitch to the whole organization, and distributing the current business plan document to everyone. Make sure all business processes are documented and integrated. If everyone has a different view of reality, you have no reality.
  1. Take time to review and resolve any personnel distractions. You need to brief the investor early if there are pending changes that have to be made, or conflicts that may become apparent during the due diligence process. Make sure everyone accurately posts their role with your startup on social media profiles, resumes, and references.
  1. Communicate what is happening and why to everyone. Don’t let the due diligence process be a surprise to the team. Make yourself available to answer any questions, show your enthusiasm, and explain both the positives and negatives of the external investment process.
  1. Visit reference customers, partners, and vendors. Use this opportunity to validate their satisfaction and support for your company and your solution. If you find open issues that can’t be immediately resolved, be sure to proactively communicate these to investors, with an action plan, rather than hope they won’t be found.

Based on the size of the investment, and the runway available, the due diligence process can take several weeks, or even a couple of months to complete. In any case, before the process starts on your startup, you should be doing your own reverse due diligence on the investor, as outlined in this article I published a while back.

For reference, here is a quick summary of key elements which most investors include in their due diligence process:

  • Key personnel review. In all cases, an investor will ask to talk to all key players, and will likely follow-up by calling references and prior associates to verify background, commitment, and experience. Since investors tend to invest in people, more than the idea, the personnel review is normally the highest priority item.
  • Status of the solution. Here investors are looking for feature problems or quality issues on the current product. A hard look will be taken at the technology maturity, the current development progress, and customer satisfaction with early product shipments. In addition, manufacturing and inventory levels will be reviewed.
  • Review of opportunity and segmentation. A key criteria for a good investment is a large opportunity with double-digit growth. This should be a validation of prior assessments, based on any recent changes in trends, economic conditions and customer feedback data.
  • Traction in the marketplace. A smart investor will take an independent final reading in the market on barriers to entry, active competition, demographics, and price sensitivity. Sales and distribution channel activity will be analyzed, as well as cost of customer acquisition, to make an independent assessment of your financial projections.

The key theme for a successful due diligence is full disclosure and no surprises before or after the commitment. If more marriages were subjected to the same rigor, the divorce rate would likely not be in the current fifty percent range. In business as in other relationships, people on the team that have to be above reproach, committed, and working on the same page.

Startup equity investments imply a long-term business relationship, lasting an average of five years. During that period, it is very difficult for either party to get out of the deal, since there is no public market for the stock, and business divorces normally mean bankruptcy. It’s worth your time to do a little extra work here, and make the honeymoon phase a win-win one for both sides.

Marty Zwilling
Startup Professionals Musings

6 Ways To Test Your New Venture Sustainability Early

new-venture-innovationHow do you convince investors that your business model will really work, before you have a revenue stream that exceeds your expenses? Even if you are bootstrapping your business, and you are the only investor, you should be asking yourself the same question. Too many founders have learned that passion and free beta products do not imply a sustainable business.

Proof of any business model starts with a finished product or solution, sold to a new customer for full price, with high satisfaction for the value received. Of course, that has be a repeatable event, with enough revenue to sustain the business. The conundrum is that once you have really proven the business model, you no longer need the investor money you asked for to start the business.

So what should an entrepreneur do to convince themselves, as well as potential investors, that they have a viable business model before it is totally proven? Here are some basic principles from my own experience that will improve your odds and keep you on the right track:

  1. Recognize that you are not the market. No matter how passionate you are about your solution, it doesn’t mean that if you build it, they will come. Don’t skip the market research, input from influencers, analysis of competitors, and the simple act of really listening to potential customers via social media, before quantifying your opportunity.
  1. Start selling it before you build it. Marketing is everything these days. On the average, it takes as long to build marketing momentum as it does to build the solution. If you wait to begin marketing until your product is final, you will find it very expensive to pivot to meet real world input, or the whole opportunity may have moved on without you.
  1. Plan for a real revenue model. The free model, with a loose intent to monetize later, made popular during the tech bubble, doesn’t work anymore. No matter how good your cause, it takes real money to sustain a business. Decide early where and when money will come from, set some milestones and metrics, and work to a plan, or be caught short.
  1. Word of mouth is not adequate for marketing and sales. Even though the Internet is pervasive and free, you should not assume that a website is all you need for sales and marketing. To get the visibility and distribution you need will likely require one or two levels of partner relationships and a real model for marketing, events and promotions.
  1. Customer support is more than handling exceptions. Customers expect to be delighted in all phases of the product life cycle — understanding features, pricing alternatives, returns and problem resolution. A detailed process, with empowered employees and adequate budget, are mandatory to any viable business model.
  1. Everyone must be part of the sales process. Don’t assume that only customer-facing employees need to understand sales, and that these people can be hired and trained at the last minute. Everyone on your team must maintain the mindset that customers are the key to your business model, rather than technology or accounting.

I’m not suggesting that all these business model elements need to be perfect before you ask for funding or open doors for business. As an active angel investor, I do expect founders to be able to communicate a plan to implement all key business model elements, just as I expect them to understand and plan for all the elements of their technology and their solution.

In my experience, every great product is not a great business, and every great business model involves far more than a great product. Your challenge is to present a total business solution to the right customer set to build your credibility and momentum. Without these, your dreams and your business model may never get the fuel they need, and will burn out quickly.

Marty Zwilling

Startup Professionals Musings

[OncoHost in Venture Beat] OncoHost raises $8 million to develop AI that predicts cancer treatment responses

OncoHost, a company developing AI technology to characterize, analyze, and predict patient response to treatment, today announced it raised $ 8 million.

Read more here.

The post [OncoHost in Venture Beat] OncoHost raises $ 8 million to develop AI that predicts cancer treatment responses appeared first on OurCrowd Blog.

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6 Ways To Calibrate Your Fit To The Right New Venture

right-new-ventureBeing an entrepreneur seems to be one of the most popular lifestyle aspirations these days. According to most definitions, anyone who starts a business is an entrepreneur, but most people don’t realize there are many startup types out there, and picking the wrong one can be just as disastrous as being stuck in a cubicle at work, or doing things with no interest and no skills.

In my view, this mismatch of motivation to your business model is the primary reason that 90 percent of startups ultimately fail, and a shockingly high 80 percent of employees are dissatisfied at work. Thus it behooves every entrepreneur to pick the startup model that best matches their real motivation. Here are six considerations to get you started on the right startup:

  1. Invented a solution to a painful existing problem. You have proven that you can create an innovative product, but creating a business is a whole new challenge. The old adage of “if we build it, they will come” doesn’t work anymore. Every business needs marketing, distribution, a positive revenue model and intellectual property to survive. You won’t be a successful and happy entrepreneur if you aren’t motivated to build a business.
  1. Aspire to be in control of your own domain. There are many business types that don’t assume any new invention or service, such as franchising, multi-level marketing (MLM) or freelancing. These do require business management and execution skills, as well as the discipline to manage yourself. Just don’t look for an investor to fund your efforts here, since investors will likely be tougher bosses than corporate managers.
  1. Looking for a path to dramatically increase your income. This is a tough one, since most of the overnight startup successes I know took six years or more. Franchises and consulting businesses have an earlier and higher success rate, but typically have a lower return. With new products and services, you can hit the jackpot, but many struggle or fail.
  1. Trying to fulfill family or peer expectations. Don’t try to be an entrepreneur just to prove something to a loved one, friend or sibling. There are no business types that work well here, except maybe an existing family business that is already successful. If you must proceed, at least pick something you love, or a social cause to benefit society.
  1. Seeking a new career challenge to follow an existing success. If you have a comfortable position from a previous success, and are not looking to retire, a great business is to share your expertise and experience through consulting. Another great learning opportunity and win-win deal is to co-founder a new high-tech startup team.
  1. Fulfill your legacy and responsibility to society. Environmental startups and non-profit businesses are just as challenging as the next disruptive technology startup, and just as likely to change the world. Leaving a personal legacy is a great motivator to switch to entrepreneurial work, if you have that passion and determination.

No matter which of the entrepreneur business models you choose, don’t expect the work to be easier than a corporate job. In fact, most successful entrepreneurs would argue just the opposite. Success in any entrepreneur role requires a serious commitment, determination and learning from setbacks. Switching business models is not usually a shortcut to success and happiness.

I often recommend to aspiring entrepreneurs that they first take a job with another startup in the same realm as the one they envision to get some practical insight into the challenges, make contacts and learn more about their own motivations. Then take the big step of starting your own business, with fewer surprises, some good connections and likely more accumulated savings.

Overall, it is important to remember that happiness breeds success more often than success breeds happiness. Every aspiring entrepreneur should play to their strengths and interests, rather than listen to all the well-meaning advice you will hear from friends and experts. The exciting part about being an entrepreneur is that you can tailor the role to match your real motivations.

Marty Zwilling

Startup Professionals Musings

Delivery Hero launches venture capital fund DX Ventures to drive innovation in food, delivery and beyond – Yahoo Finance UK

Delivery Hero launches venture capital fund DX Ventures to drive innovation in food, delivery and beyond  Yahoo Finance UK
“nigeria startups when:7d” – Google News

[Arbe Robotics in Venture Beat] Qamcom will bring Arbe’s 4D imaging radar to trucks, mines, and farms

Just as 2D computer vision systems are helping factories to identify defective parts and webcams to blur out home office backgrounds, next-generation imaging radars will enable autonomous and semi-autonomous vehicles to understand their environments for safer navigation.

Read more here.

The post [Arbe Robotics in Venture Beat] Qamcom will bring Arbe’s 4D imaging radar to trucks, mines, and farms appeared first on OurCrowd Blog.

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Tiger Global is raising a new $3.75 billion venture fund, one year after closing its last

According to a recent letter sent to its investors, Tiger Global Management, the New York-based investing powerhouse, is raising a new $ 3.75 billion venture fund called Tiger Private Investment Partners XIV that it expects to close in March.

The fund is Tiger Global’s 13th venture fund, despite its title — the partners might be superstitious — and it comes hot on the heels of the firm’s 12th venture fund, closed exactly a year ago, also with $ 3.75 billion in capital commitments.

A spokesperson for the firm declined to comment on the letter or Tiger Global’s broader fundraising strategy when reached this morning.

It’s a lot of capital to target, even amid a sea of enormous new venture vehicles. New Enterprise Associates closed its newest fund with $ 3.6 billion last year. Lightspeed Venture Partners soon after announced $ 4 billion across three funds. Andreessen Horowitz, the youngest of the three firms, announced in November it had closed a pair of funds totaling $ 4.5 billion.

At the same time, Tiger Global has seemingly has a strong case to potential limited partners. Last year alone, numerous of its portfolio companies either went public or was acquired.

Yatsen Holding, the nearly five-year-old parent company of China-based cosmetics giant Perfect Diary, went public in November and is now valued at $ 14 billion. (Tiger Global’s ownership stake didn’t merit a mention on the company’s regulatory filing.)

Tiger Global also quietly invested in the cloud-based data warehousing outfit Snowflake and, while again, it didn’t have a big enough stake to be included in the company’s S-1, even a tiny ownership percentage would be valuable, given that Snowflake is now valued at $ 85 billion.

And Tiger Global backed Root insurance, a nearly six-year-old, Columbus, Oh.-based insurance company that went public in November and currently boasts a market cap of $ 5.3 billion. Tiger owned 10.3% sailing into the offering.

As for M&A, Tiger Global saw at least three of its companies swallowed by bigger tech companies during 2020, including Postmates’s all-stock sale to Uber for $ 2.65 billion; Credit Karma’s $ 7 billion sale in cash and stock to Intuit; and the sale of Kustomer, which focused on customer service platforms and chatbots, for $ 1 billion to Facebook.

Tiger Global, whose roots are in hedge fund management, launched its private equity business in 2003, spearheaded by Chase Coleman, who’d previously worked for hedge-fund pioneer Julian Robertson at Tiger Management; Scott Shleifer, who joined the firm in 2002 after spending three years with the Blackstone Group; and, soon after, Lee Fixel, who joined the firm in 2006.

Shleifer focused on China; Fixel focused on India, and the rest of the firm’s support team (it now has 22 investing professionals on staff) helped find deals in Brazil and Russia  before beginning to focus more aggressively on opportunities in the U.S.

Every investing decision was eventually made by each of the three. Fixel left in 2019 to launch his own investment firm, Addition. Now Shleifer and Coleman are the firm’s sole decision-makers.

Whether the firm replaces Fixel is an open question. Tiger Global is known for grooming investors within its operations rather than hiring outsiders, so a new top lieutenant would almost surely come from its current team.

In the meantime, the firm’s private equity arm — which has written everything from Series A checks (Warby Parker) to checks in the multiple hundreds of millions of dollars — is currently managing assets of $ 30 million, compared with the $ 49 billion that Tiger Global is managing more broadly.

A year ago, Tiger Global, which employs 100 people altogether, was reportedly managing $ 36.2 billion in assets.

According to the outfit’s investor letter, the firm’s gross internal rate of return across its 12 previous funds is 32%, while its net IRR is 24%.

Tiger Global’s investors include a mix of sovereign wealth funds, foundations, endowments, pensions, and its own employees, who are collectively believed to be the firm’s biggest investors at this point.

Some of Tiger Global’s biggest wins to date have include a $ 200 million bet on the e-commerce giant JD.com that produced a $ 5 billion for the firm. According to the WSJ, it also cleared more than $ 1 billion on the Chinese online-services platform Meituan Dianping, which went public in 2018.

Tiger Global also reportedly reaped $ 3 billion from majority sale of India’s Flipkart to Walmart in 2018,  though the Indian government has more recently been trying to recover $ 1.9 billion from the firm, claiming it has outstanding tax dues on the sale of its share in the company.

Not last, Tiger Global owned nearly 20% of the connected fitness company Peloton at the time of its 2019 IPO (a deal that Fixel reportedly brought to the table, along with Flipkart).

Peloton, valued by private investors at $ 4 billion before doubling immediately in value as a publicly traded company, now boasts a market cap of $ 48.6 billion.

Tiger Global has invested its current fund in roughly 50 companies over the last 12 months. Among its newest bets is Blend, an eight-year-old, San Francisco-based digital lending platform that yesterday announced $ 300 million in Series G funding, including from Coatue, at a post-money valuation of $ 3.3 billion.

It also led the newly announced $ 450 million Series C round for Checkout.com, an eight-year-old, London-based online payments platform that is now valued at $ 15 billion. And it wrote a follow-on check to Cockroach Labs, the nearly six-year-old, New York-based distributed SQL database that just raised $ 160 million in Series E funding at a $ 2 billion valuation, just eight months after raising an $ 86.6 million Series D round.

Another of its newest, biggest bets centers on the online education platform Zuowebang, in China. Back in June, Tiger Global co-led a $ 750 million Series E round in the company.

Last month, it was back again, co-leading a $ 1.6 billion round in the distance-learning company.

Pictured: Scott Shleifer, managing director of Tiger Global Management LLC, right, speaks with an attendee during the UJA-Federation of New York Wall Street Dinner in New York, on Wednesday, Dec. 14, 2011. 

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