Try to anticipate what their questions might be and prepare concise an d
convincing answers. Ready and well-thought- out answers to tough questions
demonstrate a clear underst anding about the challenges to the business.
The presentation is the beginni ng of the investors’ due diligence process.
They need to be comfortable that they understand the challenges facing the
company before they commit capital. Prepare and distribute key documents
at the initial meeting. These may include documents related to incorpor-
ation, board minutes, tax returns, and intellectual property protection,
Regardless of the source of equity financing, whether angels or VCs,
expect ‘‘due diligence’’ to be performed. Due diligence is simply verification
of the claims in the business plan by the potential investor. The claims made
by the management team about their qualifications and experience, market
research, the attractiveness of their product or service, and other claims will
be thoroughly examined.
In checking out the technical aspects of the business plan, there is often a
partner in-house with experience in the relevant technology. If not, the firm
will usually share the plan with a colleague with relevant experience or hire
an expert to evaluate it.
The due diligence process is one of the main reasons venture capital firms
specialize in certain industries. This allows them to build up an expertise that
makes the evaluation of claims in a business plan more efficient.
Expect that during the due diligence process, your custom ers, suppliers,
and competitors will all be contacted. In addition, companies that are not
your customers, but who could be, will be contacted and asked why they do
not currently buy from you.
During due diligence the VC will visit your operation, talk to your
employees, interview all members of the management team, and inspect
your production processes. VCs generally have very broad networks to
rely on. They may choose to contact people or companies named in your
business plan, such as those listed in your advisory board, or they may
choose to contact experts in the field whom you did not recommend.
Strategic partners or primary vendors listed may also be contacted as a
means of evaluating them, or to verify the nature of your relationships, such
as any exclusive contracts or agreements in process being claimed. Other
industry contacts may be asked for opinions on your advisors and the
businesses with which you will be working. Former business associates will
be contacted to help assess the strength of the management team.
202 Venture Capital