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Evaluating Prospective Investors

Q: What's important when evaluating prospective investors? What kind of due diligence is necessary?

At a recent Dingman Center event in Bethesda, Tony Carter of International Business Group talked about financing deals from his side. He emphasized that due diligence is a two-way process. He reminded entrepreneurs to check out investors carefully. It's common sense, but this step often gets short shrift when the entrepreneur is busily hunting for funds to make the next payroll. In the incubation model that IBG uses, the right financing is not JUST money and it's not just a single-stage financing event. The companies IBG funds have a monthly reporting, review, and funding ritual with IBG, with lots of ad hoc mentoring along the way.

Ted Hooban of SuperSonicBOOM noted that sometimes the interests of the incubatee and incubator are not *always* completely aligned. Once you're one of a number of companies in a portfolio, if you are not a "rising star" --outperforming the others -- then you might not get as much attention and/or resources from your incubator as the company that's performing best at the moment. [John Casey,]

Here is some advice from Jim Condon, CFO of CyberCash, about investor due diligence:

The important questions to ask are:

  1. Have you made this kind of investment before? With whom? Can I speak with their management? (you need to know how "opinionated" the investor is--not that one direction is better or worse, you just need to know).
  2. What do they bring to the table other than cash? The investor, I would presume, will demand significant Board presence, so be sure you're comfortable with that.
  3. Are all potential investors equal? Do some want straight equity? What are their preferences, rights to future participation, etc.?
  4. Can they/will they help build the management team, and if so, how?; a) through their industry-wide reputation, or b) as "retirement home" for their senior folks?

After you sort through all of the above, you can begin to negotiate. Then and only then look at numbers. It should be the last criteria, not the first.


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