Has the deal been shopped around to many investors, each of whom rejected it?
An eighth screening mechanism used by many venture capitalists is to determine whether deals have been "shopped," that is, whether they have been presented to and been passed over by other investors. Venture capitalists generally avoids shopped deals. Properly employed, this strategy makes a lot of sense. Shopped deals, by difinition, have been reviewed and rejected several times by other venture capitalists. If a particular venture capitalist trusts the business and investment judgment of another investor who rejected the deal, there s no reason that the former should not rely on the latter's negative due diligence. However, rejecting a deal solely because it was shopped, without finding out who rejected the deal and why it was rejected, could result in the venture capitalist missing a great opportunity. Twenty venture capitalists turned down Hotmail before Draper Fisher Jurvetson ivested; Hotmail was later sold to microsoft ofr over $400 million.
Friday, January 22, 2010
Monday, January 18, 2010
Quality of customers and/or partners
Has the company signed any impressive customers and/or partners?
One thing that often get a company quickly past the screening phase of due diligence is the ability to list an impressive customer or two, or to have inked a deal with a strategically valuable partner. The venture capitalists at Oak Investment Partners state that they look for "distinctive relationships that have been formed with customers or partners that give (them) good visibility into the near future." The ability to close important deals in indicative of the ability to succeed, especially in the early stages, where one key deal can make or break a company. Closing such deals also demonstrates momentum. Companies that can sign one important deal usually have a much easier time signing the next, and the next, just as a snowball builds mass quickly once its starts rolling. Therefore, venture capitalists tend to be strongly drawn to companies that can demonstrate they are just beginning to roll.
It is certainly most impressive when such deals have been finalized, but venture capitalists also are interested in those for which companies have only received letters of intent. LOIs are usually non binding, but they lay the foundation for final deals by spelling out their principal terms. They are often an important and necessary intermediate step toward finalizing deals, and companies that obtain them offer strong evidence that the other party is seriously interested in striking a deal.
One thing that often get a company quickly past the screening phase of due diligence is the ability to list an impressive customer or two, or to have inked a deal with a strategically valuable partner. The venture capitalists at Oak Investment Partners state that they look for "distinctive relationships that have been formed with customers or partners that give (them) good visibility into the near future." The ability to close important deals in indicative of the ability to succeed, especially in the early stages, where one key deal can make or break a company. Closing such deals also demonstrates momentum. Companies that can sign one important deal usually have a much easier time signing the next, and the next, just as a snowball builds mass quickly once its starts rolling. Therefore, venture capitalists tend to be strongly drawn to companies that can demonstrate they are just beginning to roll.
It is certainly most impressive when such deals have been finalized, but venture capitalists also are interested in those for which companies have only received letters of intent. LOIs are usually non binding, but they lay the foundation for final deals by spelling out their principal terms. They are often an important and necessary intermediate step toward finalizing deals, and companies that obtain them offer strong evidence that the other party is seriously interested in striking a deal.
Wednesday, January 13, 2010
Screening due diligence #6 Quality of the origin
Does the origin of the company conform to successful patterns?
A sixth screening mechanism used by some venture capitalists involves an examination of companies' origins. They feel much more comfortable with companies whose origins resemble those with whom they have met success in the past - that confirm to successful and familiar patterns. For example, venture capitalists are used to backing companies started by well-known executives who have to backing companies started by well-known executives who have "spun out" of established, market-leading companies, or by well-known university professors who have developed cutting-edge innovations, or by hungry and brilliant graduate students who have happened on the "next big thing" during their studies. Companies with these origins, and others conforming to other patterns of success, tend to find venture backing relatively easily. On the other hand, companies that have questionable or unusual origins may find that venture capitalists are very tight-fisted. Recognizing patterns of success makes sense for venture capitalists, because parrern, by their nature, repeat themselves; all things being equal, companies whose origins conform to successful patterns tend to be success themselves.
A sixth screening mechanism used by some venture capitalists involves an examination of companies' origins. They feel much more comfortable with companies whose origins resemble those with whom they have met success in the past - that confirm to successful and familiar patterns. For example, venture capitalists are used to backing companies started by well-known executives who have to backing companies started by well-known executives who have "spun out" of established, market-leading companies, or by well-known university professors who have developed cutting-edge innovations, or by hungry and brilliant graduate students who have happened on the "next big thing" during their studies. Companies with these origins, and others conforming to other patterns of success, tend to find venture backing relatively easily. On the other hand, companies that have questionable or unusual origins may find that venture capitalists are very tight-fisted. Recognizing patterns of success makes sense for venture capitalists, because parrern, by their nature, repeat themselves; all things being equal, companies whose origins conform to successful patterns tend to be success themselves.
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