Due Diligence: Corporate Information

April 27, 2010 2 Comments

Let’s now look at a big component, the Corporate information. This includes all aspects such as structure of share capital, governmental notices, minutes and resolutions, list of directors, securities, agreements relating to Shares of the Company and operations. Here are some specific point of interests:

Directors
This can be quite important if you are doing some form of Merger or Leveraged buy-out (LBO). Understanding who these Directors are can actually help you during the deal making process. Everybody is involved for a reason (and it can’t just all be about philanthropy) and knowing this early on can be valuable – even more if you are considering keeping some of these Board members going forward. Of course, you will want to get rid of the VC related Directors but you don’t want to exclude 3rd parties without a proper reflection.

Senior Executives or Officers
Who is the executive team? What is their individual roles and actual contribution? You want to find out who is really running the business and how they are doing it. Sometimes you might have many VPs in the Company but only to realise that they are basically a bunch of “yes men” to the CEO. It is crucial to understand beyond their title who are the movers and influencers (right or wrong) within the Company you are acquiring.

Shareholders’ agreement
Does the Company have a shareholders’ agreement, what type is it? Who are the shareholders that have special voting rights? You also need to understand any special components such as vetoes, multiple dips, carve outs, etc. This can actually help formulate a valuation/offer that will make the deal happen. You also want to make sure who is benefiting from the employee stock option plan (ESOP). Often, start-ups are very aggressive on valuation and therefore put the exercise price under water (ESOP’s worth nothing). Planning to new ESOP or special consideration for key employees are not required to make the deal but are key in making the integration and acquisition ultimately successful.

Subsidiaries and Other Entities
How is the overall Corporation structured? How many subsidiaries does the Company have. This is crucial in understanding how you will operate this going forward but also for things such as Tax considerations. Never underestimate how this can impact the business once acquired. Not all finance deal coming out are as good as when created…

Business Plan
You need to get an up to date version of the Company’s business plan but also all business and products plans from the past five (5) years. This is key in determining how accurate and realistic the product and executive teams have been for the past years. As the Company will make representations on the sustainability of the business going forward, knowing how good they’ve done in the past will help you put in place the right level of reps and warranties on the deal (and also including escrow).

Relationships Between Individuals
Another very important aspect of a transaction is to understand the relationship (family, corporate, financial) between every director, senior executive, shareholder or employee of the Company. Who is dating the CEO’s daughter? Who is working in Support but is also married to the VP of Products? Is the main supplier of consulting services actually the cousin of the Dir. Of Operations? Never forget that blood is ticker than ink and enterprises that have deep roots in family ties require a greater deal of attention (and finesse) if you want the acquisition to be successful.

Past acquisitions
What acquisitions were done in the past. What are the key elements still ongoing on those deals (escrow, retainer programs, IP ownership, etc)? What assets were acquired in recent years? You want to make sure that all IP and rights were properly transferred to the Company you are acquiring. Make sure to include all past obligations as part of your assumptions – including implicit rights given to certain employees or shareholders. Just remember that while it is good for a seller to go thru multiple acquisitions (greatly reduces their own liability), it is the opposite for the acquirer ..

Filed under Acquisitions, Business Principles Tagged with , , , , , ,

Getting market data at all cost

March 16, 2010 2 Comments

I have read a fairly large amount of business plans in the latest coupe of months and I can say that there is no excuse for lack of market data and research. Of course, you might say that it is time consuming to do such research and you already know the market – but this is not necessarily the case of your potential investor. No entrepreneur should assume that the VC gets it and knows it all. Having solid references for your market (including sizing, breakdown by geo, age, function, etc.) taken from a valid source is key to not only support your hypothesis but also help educate any potential investor that might not know as much as you do.

Free market data

There is out there a lot of different sources for free market data including Google search, Wikipedia, the Bureau of labor statistics (http://www.bls.gov/), and the LinkedIn direct ads program (https://www.linkedin.com/directads/). The BLS is a gold mine of lots of data such as definition of the types of employments, breakdown by age, salary range, employment growth, etc. LinkedIn direct ads might not sound like a place to do market sizing but I find it quite useful to simulate the creation of an ad (you do not need to really create the ad, just pretend). LinkedIn will allow you to select specific criteria such as job type and function, seniority, location, industry, etc. After you have selected a few elements, LinkedIn will indicate the “addressable market size” for your potential ad. You can then take these numbers and bake them into your own spreadsheet – courtesy of LinkedIn …

Paid market data (but with a free trial)

While the D&B Selectory (http://www.selectory.com/Selectory/Login.aspx) is a paid service, they do offer a free trial; enough for you to extract key information about market sizing and demographics – you can extract international as well as USA breakdown: east, west, northern, south, central, etc. Of course you will need to pay if you want to get access to the customer list but you can decide to do so when you have money to spare …

Paid market research

I know a lot of people that think that buying for market research is a waste of your dollars. While I would agree that you do no buy anything and everything that moves, I believe that buying a few and well selected paid market research. This is quite key when you are looking to extract market trends and information that might not be otherwise available for free (for example, expected customer spend for a specific product type or service). Some of my favorite sites for such paid content include Market Research (http://www.marketresearch.com) and Research and Markets (http://www.researchandmarkets.com).

Bottom line; do not go forward with you business plan and funding process without some level of market research and sizing. No matter how little you do, it is always more credible than to try to explain your gut feeling :-)

Filed under General, Product Management Tagged with , , , , , , , ,

The importance of leveraging your customer base when looking for funding

November 19, 2009 Leave a comment

Don’t you love reading a business plan filled with hypothesis where most of it is purely based on gut feelings or mathematical equations extracting a given percentage of a given market? I have been recently talking about credibility and today’s topic is no exception. Too many startups are not leveraging their first set of customers.

Finding patterns early
As soon as you have more than 20 customers, you need to start extracting trends (or lack thereof). How many are buying for the same reasons? Are they all from the same market segment? How about their size? Any indicators that you can find in your customer data can become valuable information as you build a business plan for a round of funding.

Growing from something means a lot
As soon as you can project trend lines for growing a specific customer base, it add credibility to your plan. Of course you need to be realistic about the accelerators that the investment will give you – growing at 300% or more in the first couple of years is possible but not over 5 years (scalability is not magic, even with lots of money). Any portion of your business plan that is not based on customer trends will be discounted a lot more. Predicting to sell 2M$ of something without having won any previous customers is always a challenge.

One is an anecdote, two is potentially a trend

While customer metrics and trends are important, don’t fall for finding trends where they do not exist. If one customer bought a specific solution for you, it does not mean more will buy. Having a second one will help but you need at least 3 customers of the same type and buying for the same reasons before you can start to get serious with any trending. If you can’t find any trends by simply looking at your customer data, then spend some time with your customers – asking them questions that will help you find any patterns.

More is not necessarily better

Ok so you must wonder why I am saying this after mentioning that you need more than a few accounts in order to begin to trend. You would think that having many would help. Well it does as long as your customer database is coherent. For example, if you are pushing a free version of your solution, make sure that your samples align with whom you are trying to sell. If you are selling a high-end solution, getting students and non-profit organizations to download your free software won’t help you commercial business. Even more importantly if you are calculating conversion rates to justify your revenue plan.

At the end, data analysis is not obvious and if you don’t have a lot of experience or are unsure about what you are seeing, seek some support from someone that has done this many times in the past. But don’t go without proper metrics to support your business plan.

Filed under Business Principles, Finance Tagged with , , , , , , ,

Agility in a small company

October 19, 2009 Leave a comment

Being agile is one of those words you hear a lot when you talk to startups and small companies. The other time, an entrepreneur even told me that this allowed his company to change product plans every week and serve each customer in a unique way. He went on to affirm that this was great asset that allowed his company to react better and faster than his “bigger competitor”.

Why is this the wrong type of agility?

Te begin I will say that I truly believe that agility is a key asset in a company but this is not a permit to improvise and not knowing exactly where you are going. Take as an example a football game. The goal (mission) is very clear and each and every player has practiced and rehearsed a well-defined playbook (business plan, strategy). When the quarterback gives the ball to the running back, they both are executing on a common plan taken from the playbook. Agility comes when the running back is trying to go the furthest and needs to react to competition and other factors that prevents him to run the play as planned. The goal and direction has not changed, just the execution of the play. As soon as the running back has finished his run, the offense teams immediately huddles back (communication) and selects another play from the playbook. You don’t see any player changing the goal or the overall strategy, just changing the execution has it happens.

Agility in product planning

As market conditions and competitions change the landscape, it is indeed important to be able to rapidly REVISIT your own product plans and strategy – but this is not an excuse to not take the time to build the right type of product roadmap and long term strategy. Agility comes in the form of rapidly ADJUSTING your plans; not making new ones up every other day. While product plans sometimes need to be updated regularly, no market really moves so fast that you can’t plan ahead. Yes there are sometimes major game changers but these don’t happen all the time – and ideally you want to be the one changing the game.

Be agile where you need to be

Building great products takes time and you need to stay focused. Agility is great when it comes to your development process or a planning process – but much less when you are executing. Of course, you need to adapt when you see that your plan won’t work out but this cannot be a knee jerk reaction. At the end of the day, don’t confuse your ability to react to market conditions and competition with lack of planning and long-term vision. And if there are so many bumps on the road that you can’t foresee and your so-called “agility” barely allows you to survive, you’re already dead – you just don’t know it yet …

Filed under Business Principles, General, Human Ressources Tagged with , , , , , , , , ,

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