IDEA: 3-DAY DUE DILIGENCE

(originally posted on the Click Workspace blog here)

PROBLEM & OPPORTUNITY

Founders who have to spend a ton of time raising money are not  spending that time helping their ventures, which can hurt them pretty badly! But due diligence does take time and rushing it is a good way to make a lot of bad investments.

POSSIBLE SOLUTION

This blog post from Y-Combinator’s Paul Graham and my experience helping run the Silvertip Awards for the Angel Capital Association got me to thinking… what if we could:

  • Offer entrepreneurs an angel-level investment process that goes from application to signed term sheet in less than a week.
  • Leverage the entrepreneurs and college students (primarily MBAs and students of entrepreneurship) to conduct filtering and accelerate due diligence.
  • Ask the angels to carve out a few days that they will dedicate  to the event. No other business, no distractions.
  • The organizers assemble all the due diligence resources the angels will need to help them move at warp speed.
  • Use highly standardized (and public) term sheets and due diligence templates.

SAMPLE IMPLEMENTATION

Day 0 (application & orientation): Teams apply using standardized application form.  Make sure the form gathers all the kind of info that tends to slow things down later such as references, any files people will need access to, etc.  Meanwhile, students recruited from area colleges gather in person for an orientation session.

Day 1 (pre-screening): Students, gathered together in-person, go through a series of intensive, structured activities using a crowdsourcing technology to filter down the applicant pool to a manageable number.  Angels are invited to participate.

Day 2 (screening):  Angels review the presentation videos of the teams left standing and then head out to breakout sessions with the teams they find most interesting.  Students are allowed to spectate, conduct their own due diligence, and post their findings to the crowdsourcing platform.  Angels, using what they have learned in person and what they have learned from the student’s research on the online platform, each pick one  venture to conduct due diligence on (done in concert with all other angels interested in that same team).  These teams are provided a detailed list of high-priority due diligence questions,

Day 3 (due diligence): Due diligence teams meet in-person with their ventures through a series of structured, focused meetings.  Students continue to spectate and participate online.  Angels might call on students who have proven themselves a savvy to actively participate in the live due diligence.  The day ends in an “awards ceremony” where investments are declared and awards to top-performing students are handed out.

MINIMUM VIABLE PRODUCT:

I believe strongly in the lean startup methodology , so here is a minimum viable product implementation that might get the ball rolling.

  • Get 3-5 angels to commit to making $2-5k grants each.
  • Focus on concept or seed-stage companies (like those that apply to UMass EI’scompetition or to VVM)
  • Get one MBA program (UMass? Baypath?) and/or one large entrepreneurship program to provide students (UMass EI? Baypath? Maybe the new Smith program?).
  • Don’t run it as 3 consecutive days, instead split it over two consecutive weekends.  Heck, maybe the first weekend is the one right after the Grinspoon collegiate entrepreneurship conference where 500 college students gather! That way students don’t miss any school :).

Love your thoughts!

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