Bootstrapper.com - Confessions of Serial Entrepreneurs

I am often asked what VC’s typically look for when performing analysis/due diligence on a business plan. Below is a plain and simple outline on what they look for:

1. Cover Page

1. Table of Contents

1. Executive Summary
   1. Company Intro
   2. Concept and Mission
   3. Mission Statement
   4. Strategy
   5. Company’s Products and Services
   6. Market Analysis and Trends
   7. Competitive Analysis
   8. Value Add of the Company
   9. Financing Amount, Purpose and Time Span
   10. Milestones
   11. Management Profile
   12. Financial Summary
   13. Exit Strategy

1. Company History and Current Status
   1. How Company Started
   2. Founders and Personnel

1. Revenue Model
   1. Nature of the Business
   2. Profit Margins of Industry

1. Technology, Products and Services
   1. Description of the technology (include diagrams)
   2. Value Add
   3. Competitive Advantages
   4. Proprietary Nature
   5. Current State of Development

1. Market Analysis
   1. The Overall Industry
   2. Market Segments Targeted and Rationale
   3. Customer Profiles (needs met/unmet, buying patterns)
   4. Describe how the company’s products will meet the needs of intended markets
   5. Describe all industry forces (suppliers, buyers, threat of substitutes)
   6. Barriers to Entry
2. Competitive Analysis

1. 1. Competitor Profiles (History, Segments Served, Market Share)
   2. Provide Solutions to Breech Entry Barriers
   3. Competitive Advantages (IP, etc)
   4. Anticipated reaction from competitors upon market entry

1. Sales and Marketing

Sales

1. 1. Material, Labor, Overhead Costs
   2. Methods of Promotion and Distribution
   3. Revenue Model
   4. Customer Selling Approach

Marketing

1. 1. Identify customer purchasing decisions and trends
   2. Identify current needs served and unmet by competition
   3. Identify company’s positioning (quality vs. price, innovator vs. adaptor, follower vs. leader, private sector vs. government)

1. Management Profile
   1. Background Information
   2. Capabilities
   3. Management Gaps
   4. Organizational Chart

1. Financial Strategy

Financial Operations

1. 1. List of all loans and terms
   2. Operating Budget
   3. Milestones
   4. Pro-forma income, cash flow and balance sheet

Financing

1. 1. Breakeven Analysis
   2. Amount Needed, Time Period, Total Amount Required
   3. Capitalization Table showing the amount raised and the percentage of ownership
   4. Exit Strategy

So you’re thinking of taking on a new partner, eh?

Have you researched him?

I would like to dedicate todays post to the most important part of building organizations - due diligence. Most of you entrepreneurs out there that are reading this probably get scared by the words since the natural inclination is to think of VC DD which can sometimes be painful.

However, the point of this post is to help you learn what it takes to do proper research.

1) Always ask for references. Always get phone numbers and always get the story behind the reference, not just a name. This will let you poke for inconsistencies.

2) Always make sure you have references that are both on the same level and superior. Often times, the people that work directly with the person on the level are a better resource of true productivity then the boss. After all, the boss can be an airhead asshole.

3) When interviewing someone (or just talking) ask open ended questions and let the person run their mouth. See what they are about. Interject - see if they can listen or only talk. See what they really think on topics.

4) Always ask negative facing questions. In other words, have the person rip apart your company or product or plan. This way, everything is on the table and it provides constructive criticism and helps a company learn from its mistakes instead of everyone wearing white gloves.

5) Have the person sell you on why your product is amazing. Turn the tables and have them sit in your chair and see what they do and how they respond.

This approach will let you get more real information out of people than simply going line by line through a resume and listening to bullshit being puked upon you.

Due Diligence is a great topic. It sounds scary - it sometimes is. It also is where a lot of deals for apart. Why? Most people aren’t transparent and lie.

News flash: If you’ve gotten to due diligence if you are honest, you will get the deal 90% of the time. The second your lie or screw around, you are out of luck.

What is the big hair beast known as Due Diligence ? Primarily its really just reference checking. Each firm has its own approach and sometimes there is no due diligence or Pretend Diligence but expect the following:

1) Check references, personal and professional. Sharp investors will cold call companies on your resume and ask around your industry as well.

2) Check your resume and make sure you really did work at Goldman Sachs from 86-88

3) Run a background check. So you were arrested for pot possession in 1969? Few people care if you tell them about it but they will run if you try to hide it.

4) Do the same for your management team

5) Check your assumptions and do cursory market research and make sure there is some reasonable chance of maybe hitting 1/3 of your numbers. Also double check that our whizbang technology exists, that it does what you said and that you do have 100,000 users.

This whole process can take 1 day and it can take six months. Its all about transparency.

At the same time, you should ask for references from the investors. Make sure you get references from unsuccessful investments - any investor that will give you a reference to an unsuccessful deal is probably above board if they think their former CEO that they forcibly kicked out won’t bad mouth them to hell and high-water. Any investor that won’t give references is probably a shady dude and stay away.

In the spirit of transparency, I am open myself up to some good old fashioned DD.

I invite anyone who wants to go through my cell phone and crank call my friends and contacts and see what they have to say about me.

I invite anyone to send an email to the NY Tech Meetup list and see if anyone will bad mouth me - or go up on the podium after the meetup and ask “Who has been screwed by Richie Hecker?” (warning: some people will in fact think i’m crazy but i am a self described crazy entrepreneur).

I invite you to come to my seed capital group meetings and see how i manage a group and the quality of my contacts.

I invite you to give me a list of companies or ideas or products and have me give them 10 points of feedback and 5 ideas for each. I will do this for anyone who asks.

I will fwd you 10+ emails from people in the last 3 months alone saying how thankful they are for meeting me and for my advice for their startups.

I will tell you my life story on richhecker.com and all of my philosophies on my blog here.

And I will tell you what happened with my past companies. My first real company ClickZen Worldwide, I founded when I was 15 without so much as a phone line or a dollar and turned into a company worth a couple million bucks that owned a couple million dollars in databases and a small ad network and a nice little office on Broad St. I will tell you that I split a division off of the company because my partner who is a very dear friend was an immature jerk and i couldn’t get along with any longer so i took a very big risk and spun off a division and left ClickZen. (He’s matured now and is a very close friend). ZenFinancial was my call center outsourcing company, we did telemarketing from India, i had an office in New Delhi, India. I brought in something like 200 clients in 3 years primarily myself and had a book of business going forward of $50MM+ for the next year. Fair valuation was $100,000,000. That was a lot of money. It got to be my head. I was a horrible manager and an arrogant naive asshole. I almost opened what would have been the worlds’ largest call center in what was the former Reebok factory (the famous one that got shut down for human rights violations a while back). That would have been dumb. I was called the “Father of Mortgage Lead Telemarketing in India”. I used to be proud of that dubious title. Yes, i’m that asshole

So what happened? I blew it up. I had 2 partners. One is very nice, honest and super successful. The other one I shouldn’t have been working with in the first place (My GF who is always right warned me - actually thats the best way to do some DD on me and my ideas - ask her what she really thinks - she may charge you a Coach bag for it though, I love you Bluey). It turns out he stole a fortune from the company, at least a couple hundred grand, possibly up to a million bucks by selling our leads out the backdoor - to people i introduced him too as clients i brought in originally. Most our clients cancelled, I had a panic attack, i lost my long term contracts and most of my book of business and almost went bankrupt. Scary shit. I borrowed money, threw myself in there, didn’t earn a dime for six months and saved the company. (I didn’t find out why my clients were canceling and about the theft until a year later). I sold my majority stake to my honest partner and left the industry. I took a huge haircut on its value and no I didn’t get a $50MM exit. That would have been nice but i learned from it. Mainly that the most important thing is to relax, move slow and steady and do a boatload of due diligence and active monitoring on any business partners. This is why I believe in serious hardcore break out the big guns due diligence. I didn’t do it myself and it literally cost me a fortune.

After that, I produced a tv pilot (fun but shady experience), did a bunch of consulting, invested in some random startups, completed my degree in Finance (okay, so maybe I do understand a tiny little bit about finance) and tested things out waiting for the next big opportunity.

These days, I run AdSolutia, which is a combination of a few companies, who in total generated about $700k in revenue this year - and i really haven’t tried - it’s a testing bed more than anything else. We have some amazing technology and im bringing on the former CMO of DoubleClick as Chairman.

I consult formally and informally for a dozen startups. I develop marketing strategies for fun and am a professional networker. I’m a connector. I like putting people together, any of the dozens of people who has gotten my introductions will vouch for the quality of my seal of introduction. I also run a seed capital group. I’m a startup junkie.

And that’s where I am today

I have no regrets.