Thursday, November 8, 2012

Keys to Successful Venture Capital Investing: Due Diligence

 What are the Basic Items to Look for in a Business Proposition?

There are six critical components to look for in this first stage of evaluation.

1. The Numbers Should Be Properly Presented

Everybody in the investment business lives and dies by “the numbers.” This means that the investor cannot proceed without accurate figures on a company’s past performance. Anything less than accurate and detailed (and in most cases, certified financial statements) will lead the investor into a business risk that is probably not worth the business opportunity. To repeat—no investor should make an investment without accurate historical figures.

In addition, current financial statements are an absolute must. All too often, investors are given financial statements that are ancient history. The older numbers do not reflect how the company is doing at that current moment. You should not accept any statements older than two months. Make sure the entrepreneur gives you current (either monthly or quarterly) interim financial statements, or don’t invest. Any entrepreneur who sends you poorly prepared or stale financial statements does not deserve financing.

Another thing to look for is the entrepreneur’s knowledge of the financials. You must make sure that your entrepreneur is able to explain the numbers in detail. If that cannot be done, it is a sure sign that the entrepreneur does not live and die by the numbers and, therefore, will be a poor match for you. As an investor, you must live and die by the numbers.

If an entrepreneur cannot produce accurate financial projections, he or she should hire an accountant to prepare them. However, even if hiring an accountant, the entrepreneur should still know most of the numbers by memory if he or she intends to live and die by the numbers. If you ask the entrepreneur about the financials and the answer is, “These financials were put together by my accountant and I cannot tell you why certain projections do certain things,” the small business person does not understand the numbers. This is a clear sign that you will have problems in the future unless a new member of the team is brought in to handle that side of the business.

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