Putting the Romance in Due Diligence
BY Alan Spoon
Taking on an investor is a lot like getting married. Here's how to make the courtship a bit easier.
Strong marriages often begin with a period of courtship, when two potential partners discover their good and bad habits, become comfortable with each other’s plans for the future, and of course meet the relatives.
In a marriage of business partners, ‘courtship’ is replaced with ‘due diligence’, an unfortunate phrase that certainly doesn’t have the same excitement attached to it. Fairly or not, due diligence has a reputation for being time-consuming, nosy, and unpredictable.
But due diligence can be more than ascertaining financials and legal standing. It can be a process that ultimately creates value for a company. Then it becomes a bit more exciting.
How can entrepreneurs use the due diligence process to discover more about their company while also forging a strong relationship with a potential investor?
First, allow your potential equity partners to speak with significant customers about the value they receive from the company and how that value can be increased going forward. Your customers will likely have more open conversations with a third party, which can reveal both strengths and weaknesses.
Second, use this time to develop durable historic data and some forward analysis of the core business activity (whether product sales or services). This information will allow you to better understand your long-term business model—and come to an agreement on this model with your potential partner.
Lastly, have candid conversations with your potential partners about the major tasks ahead and the skills and resources needed to tackle them. This process often provides a fresh perspective that can be both enlightening and reassuring.
If you and your investor are truly well-matched, you might find that the due diligence process generates business opportunities that might not have been discovered otherwise.
For example, we recently made an investment in an exciting company that has built a financial services platform linking wealth advisors, their clients, custodians, and underwriters.
Through the due diligence process, one of our portfolio company CEOs was able to help the newer company plan for inevitable scalability issues. Another portfolio company that works with wealth advisory partnerships introduced the new company’s offering to a few potential customers. When several wealth advisory partnerships wanted to sign on immediately, we knew we had a winner—and the new company’s CEO felt the same way.
In this model of due diligence, strengths can be extended and weaknesses remedied. Together a company and its investors can avoid surprises and make plans for a happy, long-term marriage.
ALAN SPOON is a general partner in the Boston office of Polaris Venture Partners. Alan focuses on investments in information technology, with an emphasis on revenue-stage companies, digital media, e-commerce, distance learning, and financial services.