Transcript Venture Capital Transactions

Venture Capital Transactions
Due Diligence and Post Closing
Matters
Columbia Law School
February 23rd, 2004
Today’s Agenda
Due Diligence (DD)
Screening DD
Management DD
Business Opportunity DD
DD on Intangibles
Legal DD
Financial DD
Son-U Michael Paik,
Attorney-at-Law
Post Closing Matters
Debriefing your Deals
Monitoring Progress
Monitoring Exit
Supporting your VC
Strategic InvestmentsWorking WITH your Business Unit
Records & Files
At Exit: M&A and IPO
Technology Transaction Consulting
[email protected]
What is Due Diligence?
Due Diligence (DD)
Originally used in public securities offerings context; it was a legal
obligation imposed on parties involved with the creation of
prospectuses to use DD to ensure that they contained no material
misstatements or omissions, so that the purchasers of the
securities would be better able to make informed investment
decisions.
In the VC context, the securities are issued in a private transaction;
it is the investors who must inform themselves regarding the
companies they consider for investment.
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]
What’s Involved in DD?
Due Diligence (DD) involves:
Screening DD
Management DD
Business Opportunity DD
DD on Intangibles
Legal DD
Financial DD
Son-U Michael Paik,
Attorney-at-Law
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Woodside Fund: “the thorough
investigation and analysis the
investor makes of a prospective
investment to see if it meets the
investor’s strategy and criteria for
funding. It includes an assessment
of the industry, market, business
concept, management team, the
company’s technology, products
and markets, and financials.”
Technology Transaction Consulting
[email protected]
Targeted Questions for DD
Screening DD: quickly getting to core business opportunities
Management DD: assessing the quality & potential of management
Business Opportunity DD: products, models & competition
DD on Intangibles: focus, momentum, buzz and “gut feelings”
Legal DD: uncovering and anticipating problems
Financial DD: valuation is derived & negotiated through the DD!
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]
Screening DD
Screening DD
Management DD
Business Opportunity DD
DD on Intangibles
Legal DD
Financial DD
Son-U Michael Paik,
Attorney-at-Law
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Where did the deal come from?
What’s the quality of the biz plan?
Who are current & potential investors?
Who is their lawyer? Accountant?
What’s the origin of the company?
Who are their partners and customers?
Shopped? Who has rejected it & why?
Are you in this market space?
Is the company at the right stage?
Does the company fit into your web?
Does it compete with one in the web?
How much does it want? In range?
Geographically accessible & strategic?
Is there a personal fit with the team?
Does the liquidity strategy fit?
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STRATEGIC INVESTOR
CONSIDERATIONS…
Technology Transaction Consulting
[email protected]
Management DD
• Top quality management at its disposal?
• Top quality managers? Direct & Indirect…
• Top quality managers- marketing, finance,
business development, operations, etc…
• Is management diverse and a team, now & before?
• Is it committed to long-term success?
• How does the team view you? Your involvement?
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]
Management: Individuals
• Integrity, Honesty,
Brilliance, People
Smarts, Intensity, SelfConfidence,
Committed Risk
Taking, Vision, Ability
to Execute, Problem
Solve, Adapt & Use
Resources Effectively
Son-U Michael Paik,
Attorney-at-Law
• Business Judgment?
• Background?
• Motivation(s)?
• The Peter Principle is that point
at which employees reach their
capacity, the point at which they
cannot and should not advance.
• CEO/CTO/CFO?
• Biz Dev/Marketing &
Sales/COO/BOD/BOA?
• Investors?
Technology Transaction Consulting
[email protected]
Business Opportunity DD
• Is the product evolutionary? Revolutionary?
• What is the company’s product?
• Stewart Alsop at NEA: companies find success
most fundamentally by “designing products that
people want.”
• “Quality + Innovation + Smarts + Money - Pain,
exponent 2 = Success”
• “What’s the company asking the customer to go
through for their product to work?”
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]
Does the Biz Model Work?
Markets & Customers
Who wil buy?
Products & Services
What wil be sold?
Son-U Michael Paik,
Attorney-at-Law
Chan els of Distribution
How to con ect its product with customers?
Technology Transaction Consulting
[email protected]
Financial Engine
Wil it make money?
Competitive Strategy
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Y-O-U
Existing
Unknown
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10
0
1st Qtr
Son-U Michael Paik,
Attorney-at-Law
2nd Qtr
3rd Qtr
4th Qtr
Technology Transaction Consulting
[email protected]
Competitive Advantages
• Proprietary Advantages? In technology?
Legal? Access?
• First-Mover Advantage?
• Does the company have a good positioning
strategy?
• Being better and different is not enough:
your customers must perceive this!
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]
Focus, Buzz, Momentum???
Screening DD
Management DD
Business Opportunity DD
DD on Intangibles
Legal DD
Financial DD
• Does the company have
focus?
• Does the company have
momentum?
• Has the company been
able to generate any buzz?
• What’s your Gut Feeling?
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]
Legal DD
Screening DD
Management DD
Business Opportunity DD
DD on Intangibles
Legal DD
Financial DD
After the company has been screened,
the management reviewed, the
business opportunity clarified, and
Your GUT tells you GO…
GET A GOOD TRANSACTIONAL LAWYER!!!
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]
Financial DD: Now thru Exit…
Screening DD
Management DD
Business Opportunity DD
DD on Intangibles
Legal DD
Financial DD
Son-U Michael Paik,
Attorney-at-Law
• Financial Analysis:
historical, pro forma,
IS, BS and SCF…
• Variance Analysis
• Sensitivity Analysis
• Practical Analysis…
• BURN, BURN,
BURN…
Technology Transaction Consulting
[email protected]
Financing History
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How has the company been financed?
How much is it looking for and why?
How will the proceeds from be used?
Projected capital requirements?
Prospects for future capital requirements?
Cap tables… the current ownership of the
company, by type of equity, number and
percentages, as well as the option pool.
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]
Valuation Methods
• The Venture Capital Method: applying PE ratios to
projected net earnings…
• The Comparables Method: what other pre-money
valuations are currently being given by VCs to companies
with similar characteristics…
• The QEDASI Method: negotiated, based on superior DD
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]
Post Closing
Essentially, an investor in venture
capital must continue the due
diligence process, through exit!!!
“Bring-down DD”
Post Closing Matters
Debriefing your Deals
Monitoring Progress
Monitoring Exit
Supporting your VC
Strategic InvestmentsWorking WITH your Business Unit
Records & Files
At Exit: M&A and IPO
Son-U Michael Paik,
Attorney-at-Law
Screening DD
Management DD
Business Opportunity DD
DD on Intangibles
Legal DD
Financial DD
Has there been any change
since the date of the
purchase agreement’s
execution?
Check the Representations &
Warranties of the
Company regularly!
Technology Transaction Consulting
[email protected]
“Back Office” Matters
Debriefing your Deals
Monitoring Progress
Monitoring Exit
Supporting your VC
Strategic InvestmentsWorking WITH your Business Unit
Records & Files
At Exit: M&A and IPO
Son-U Michael Paik,
Attorney-at-Law
Technology Transaction Consulting
[email protected]