The OC Metro recently ran an article, OC Tech Firms Are Cashing In, so I thought I’d share with all of you to the extent that in cites one of my portfolio companies (RF Nano) as a shining example. You can see a picture of the team below and click the link above to read the short article. Way to go team — keep up the GREAT work!!!
There has been a lot of talk lately about what the U.S. economy will or will not do this year and, more specifically, how any “downturn” will affect the venture capital community. As I stated yesterday on an OCVG panel, I’m not an economist but my personal belief here is that some of the best venture-backed companies were started during U.S. economic “down” periods and am personally encouraged for the SoCal venture community this year regardless of what the U.S. economy ends up doing this year. Maybe it is because I’m a true early-stage investor and that companies I fund this year are at the inception of their corporate life cycles… or maybe it is because I am economically ignorant and have a limited appreciation for macroeconomic symbiosis… or maybe it is because I have faith that things will work out either way. Some say that fear is the absence of faith. If you believe them, then ditch the fear and keep the faith.
I thought I’d post on due diligence since folks seem to be curious as to what it is, how much to do, and where it fits into the whole venture ecosystem. This will be a steady-stream-of-consciousness so please forgive any typos, etc. To oversimplify, due diligence is the process in which a fund decides whether it will make an investment in a particular company and I will include some generic items for consideration later in this post. The earlier the stage of company, the more “art” than “science” there is in analyzing whether to make an investment but most early-stage funds follow the guidelines below to one degree or another. The other aspect of due diligence is often left unsaid, despite the fact it is equally important — the due diligence entrepreneurs SHOULD perform when deciding which fund they would like to work with and whether they want to partner with a particular fund that may have expressed interest in investing in them. It is, after all, a two-way street and both VC and entrepreneur will be essentially “marrying” for the next few years (exceptions/divorces aside).
Deal Due Diligence
Most VCs generally break this down to 1) market; 2) technology; 3) financial; and 4) “operations”. Performing due diligence on a particular market should result in the VC being very familiar (and comfortable) with the size of the market(s) the particular company is targeting with its product(s)/service(s), the direction the market seems to be heading based on historical statistics and the forecast rate of growth (e.g., most funds don’t necessarily like investing in markets that are dying…), the typical sales cycles for the product(s)/serivice(s), and who the players are in a given market (i.e., both the real and potential competition). Technical due diligence depends on what is being offered for sale by the company and whether their success depends on any particular competitive technological advantage (i.e. intellectual property). During technical due diligence, VCs attempt to determine the defensibility of the company’s business, any differentiation, whether the company will have the necessary freedom to operate (i.e., potential patent infringement issues), and any product life-cycle issues. Financial due diligence is essentially two parts: one part is determining how much capital the company will require and whether that fits with the fund’s model and the other part has to do with analyzing the company’s financials (e.g., how much cash they have, their cap table, whether they have any debt, etc.). A part of financial due diligence may also involve determining whether the VC and/or company will be able to pull together a syndicate for larger and/or later rounds of financing. Finally, performing “operational” due diligence involves background checks on the folks involved to determine whether they are the right folks to be able to take the company to the next level based on their past experience and personal characteristics. Operational due diligence also involves making sure the business model is sound, the company doesn’t have any pending or potential legal issues, and the that the general logistics of making the investment make sense. The entire due diligence exercise serves, at a minimum, to identify and mitigate the risks associated with the deal to the extent necessary honor the VC’s fiduciary duties to its LPs. For more information about the types of risks VCs attempt to identify/mitigate, see my Arbiters of Risk post by clicking here.
Fund Due Diligence
A far too often overlooked aspect of the start-up / VC deal consumation is the diligence the start-up should perform on its prospective VCs. You would be amazed at how much “spaghetti” I get wherein folks are simply looking for funding from anyone and everyone regardless of whether their deal would be a good fit given the stage, size, and investment model of my fund. So, before I provide more specifics here, do I have all your entrepreneurs’ and would-be-entrepreneurs’ undivided attention??? I thought so… As sites like The Funded take root, I think you’ll see more transparency in the venture capital industry. In the interim, here is a short list to get you started. I started with a list that one of my attorneys, Craig Dauchy, provided for me and added my own items based on my experience as a VC and someone that has raised “OPM”. So here we go… Here’s a laundry list of questions you should be asking yourself and/or the VC to determine whether the fund in question is a good fit.:
For more on fund due diligence and general entrepreneurial advice, I recommend you see my VCs Circle of Life post and spend $45 to pick up a copy of Craig’s book, The Entrepreneur’s Guide to Business Law. Of the two, his book is better and maybe you can convince him to autograph it for you — just tell him I suggested it ;-) With that, all you entrepreneurs do your own homework and pick the right partner for the deal at hand and happy venturing.
Let’s play a new game of “Where’s OC VC?” and see if you can spot me hiding in the back of the video in the link below… I went to Vegas for CES and ended up in a music video. Ah, what an interesting job I have…
I was discussing the social networking phenomena with some VCs while at CES and one of the more prolific VCs in the sector remarked that over 60 percent of American teenagers and kids have their biographical details and/or pictures on one or more social networks (e.g. MySpace, Facebook, Bebo, YouTube, etc.) and that the number continues to grow despite privacy concerns. While I find the numbers a bit staggering, I can’t honestly say I’m surprised. The media has been glorifying exhibitionism and celebrity status for years and a vast majority of today’s social network denizens literally grew up with the Internet and American celebrity pop culture…and share their lives in a very open way. So where am I going with all this? I’m not quite sure yet as to my final destination here so much as I am about the general direction I seem to be heading. I think there should essentially be a stratification of privacy such that different protocols and permissions exist for each personal fact (or, from a metadata perspective, set of similar facts) in a way so as to afford “user-controlled flexible privacy” for individuals and organizations. So, anyone familiar with anyone working on something along those lines? If so, please let me know…
A bit of additional color commentary here. I recall reading a book about ten or so years ago, the author and title of which currently escape me, the central premise of which was that privacy ceased to exist years ago and that the best we could hope for in today’s age was the illusion of privacy. So what’s my point? I guess my point is that, illusory or not, there currently seems to be two primary degrees of privacy on-line: 1) freedom from embarrassment from others knowing certain details about you (e.g., web sites visited, products purchased, and other facts coming to light in the public forum that is the Internet), and 2) freedom from theft/fraud (e.g, ID theft, fraudulent e-commerce, etc). The former at the center of on-line advertising sector(s) and the continuing quest for contextual and personal relevancy and the latter at the center of the security sector. Both areas still ripe for innovation. Well, I’m off to check my Facebook account so until next time, happy venturing…
I thought I’d show one of my other portfolio companies, RF Nano, a little love as well since they did a video awhile back demonstrating the capability of their earlier devices. Enjoy.
Howdy there. I just returned from having spent the past three days in Vegas and thought I’d give you a teaser of what I was up to. Like 200,000 or so other folks milling about the city (most still there), I was there for the Consumer Electronic Show and for a project we are working on at My Damn Channel. We shot a live video from The Recording Studio at the Palms (thanks, Zoe and George, Jr.!!!) so stay tuned for more on this matter. In the interim, here is a clip of what the “MDC Rebel Army” is up to these days. Enjoy.
Hey all you OCVG’ers, mark your calendars for January 24th… The Orange County Venture Group is kicking off the new year with a VC Outlook 2008 at The Island Hotel in Newport Beach. Stay tuned for details.
I took a couple of weeks “off” to spend some time with my family and friends and am now just getting back in the saddle. So, what did I do while away from the office? It turns out that I’m never truly away from the office. I had a number of calls and traded a fair amount of emails with my portfolio companies despite being “out”. I guess old habits truly do die hard. I spent the bulk of the time with my family just enjoying the holidays. It gives them a whole new meaning when you’re able to do so through the eyes of a child… I also managed to read a few books recommended by friends (Done Deals, The Zookeeper’s Wife, and A Look Over My Shoulder: A Life in the Central Intelligence Agency) and even played wiffle ball yesterday for the first time in twenty something years. In any event, I hope your holidays were happy too.
