Is there value in due diligence for a company raising Series A?
At Albion VC we pride ourselves at being experienced professional investors. Our investment decisions are underpinned by a thorough due diligence process covering the market, technology, management team, legal and financial matters. This is designed to give us a detailed understanding of the key aspects of the business and help us reach the investment decision. The question is, is there value in the due diligence process for the company looking to raise a Series A, the stage we typically get involved in? Or is this just a necessary evil that a company has to go through to raise funds?
As part of the initial series of conversations most companies ask us about what our due diligence looks like and it is often obvious that many would prefer their potential investors to do as little as possible. Clearly the process places a significant additional demand on management’s time and it is understandable that many wish to limit that, raise the funds and get on with building the business. So here is the case for why a properly structured and thorough due diligence review is valuable to the investee company:
1. Asking the difficult questions can often reveal gaps in the strategy of the business or areas where management’s plans are weak or need further development. At the same time it could also reveal opportunities that the investor sees but management has not identified. These could relate to strategic positioning, market messaging and differentiation, pricing strategies and optimisation etc. This is where an experienced investor working with well selected advisers can add real value to the business even before completion of the transaction.
2. By the time the investment completes, the new investor has already considered carefully where the opportunities and weaknesses are and together with management has formulated a plan how to address them post completion. Therefore, the management team can go on executing the agreed plan immediately after closing the deal, rather than spending time on agreeing what the priorities are.
3. Having the due diligence experts hired by the VC look at the business from the outside often highlights issues that management was unaware of, or hadn’t fully appreciated. These could be technical or organisational in nature. Addressing these early through the 100 day plan strengthens the business and allows it to scale up faster. Equally importantly, areas of value and differentiation may be identified which management hadn’t fully appreciated and which can position the business better with customers and partners. In several recent investments our advisers have continued working with the companies post investment, evidence that they added real value during due diligence.
4. Knowing the strengths and weaknesses of the business and the management team, the investor enters the new relationship with their eyes open. There are no surprises at the first board meeting, avoiding starting off on the wrong foot.
5. A well focused and thorough due diligence process at Series A, which results in strengthened systems and processes, prepares the company well for a future Series B fundraise or eventual exit.
Here is what Parry Malm, founder of Phrasee, a recent Albion investment, had to say: “due diligence is an intensive and stressful process. It’s an MOT on your business – no stone is left unturned. It takes up a lot of time, and raises many questions, and is worth every second. For us, DD validated many of our thoughts – that we’ve identified a real business problem, and have developed a real scalable solution. But, it also showed us some areas for improvement, primarily in “growing up” our systems and processes, ensuring our commercial structure is as robust as possible. We also discovered some things we didn’t know before – for example, within our tech stack. Our core technology’s IP is valuable – very valuable – but what’s even more valuable is the business processes we’ve put in place to implement and scale the solutions. I suppose we did intuitively realise this, but had never enunciated it; the DD process helped highlight areas for further R&D investment. “
For the company, therefore, it is important not to seek an investor who will do little due diligence, but one with experience that will focus on the key areas, ask the right questions, look for value opportunities as well as weaknesses and think about how the due diligence findings can be used to strengthen the business. The founders should be asking who the third party advisors are and how their work will add value to the company, while minimising the burden on management time by focusing on key issues. When structured properly and led by an experienced VC, the due diligence process can add much value to the company and ensure a good start to the founder/investor relationship. Albion VC has over 20 years investment track record and has backed more than 200 companies, gaining insights and experience that few other VCs can match.
Pictured above author of the piece: Emil Gigov