What is the key focus in due diligence for an early stage (startup) company?

This topic contains 15 replies, has 16 voices, and was last updated by  Korath Wright 7 months, 1 week ago.

Viewing 15 posts - 1 through 15 (of 16 total)
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  • #67257

    Lisa Chan
    Participant

    There is insufficient financial history for an early stage company which is usually running at loss and waiting for a newly developed product being tested in the market.

    #68088

    Alexander Eck
    Participant

    The most important asset a start-up has is management motivation and competence. I guess 90% of these companies are successful with a product or service that is not the one they founded their firm with. So think of start-up invests as invests in people and ideas..

    #70854

    Fernando
    Participant

    I completely agree with Alexander Eck’s assessment. While most M&A will revolve around financials, startups greatest assets can be found in intellectual capital. Having a clear understanding of the startups’ needs and the synergies that a merger could create to expedite their growth is key. Even though the current financials may not make sense, acquiring the right startup may create a greater source of revenue, faster than creating a new product in-house.

    #73236

    Marcelo Lopes Abud
    Participant

    Hello everyone,

    Here are my thoughts about it:

    I think, due diligence in this stage should be more about the founder historic and motivations than company matters. Of course start-ups loose money, “that`s why techs they are made for”, they are made to tracionate, gain scale and makert, and in this path, investing a lot of money with no gain. Techs start-ups are made to be next Google, Facebook or Uber, they are made to grow.
    As I already said, it should be more about founder motivations, skills and historic, because only a good founder will lead a company to the success. Beware with contingents liabilities around the person of the founder, they could reflect strongly in the company future, and should be assessed. Skills should be assessed to, and encouraged to focus on new knowledge that would aggregate to company. Motivations and Objectives are one of the most importante aspects of the founder that should be assessed, having in mind that start-ups should grow and gain market very fast, or they are fated to death.

    #83391

    Anjeli Narine
    Participant

    I agree with Fernando and Alexander. I believe the potential of the company can be measured and valued in a due diligence by looking at the start-ups intellectual property, information about its key personnel and information about the nature of the contracts and terms of engagement with these key personnel to assess the likelihood of them leaving and possibly competing with the acquirer shortly after an acquisition.

    #84093

    Gregory Gills
    Participant

    I am certainly no expert but I will sign on to the “Amen” choir in that I think their IP and talent seem to be the most interesting parts of acquiring a start-up. One company I worked for did several acquisitions just to buy skills that were not easily or readily available in the market. Most of these were smaller start-up ish type companies.

    #84744

    Jenny Ewen
    Participant

    Essentially when you are looking to buy a start-up, you are looking to buy their R&D or IP that you can’t easily/quickly build for yourself. You should be looking to understand the overall market, the gap that this start-up may or may not fill and the market potential for this new product/service. You should also look at whether you can provide the start up with what it takes to translate it from it’s infancy into a huge success. Cultural fit is also important because sometimes start-ups have a very strong culture that is important to keep in tact. Also, as mentioned above, looking to see if there are any hidden huge liabilities or risks that may come to bite you later is important.

    #85870

    Zach Dogar
    Participant

    As has already been said, the key elements at seed and start up are the founders and their appetite for success.

    #96174

    Mateusz Młynarczyk
    Participant

    It is impossible not to agree with the above opinions, however, trying to complete them I think one of the most important field should be assessment of the quality ratios/indicators, which were the basis of decisions made by an analysed startup.
    This aspect is described by Eric Ries in his book “Lean startup”.
    Eric presents an interesting model called “innovation accounting”, where the main goal is to present appropriate view of each project at its early stage.

    #96561

    Ang Pek How
    Participant

    A startup company does not possess historical track record and there are no record on the financial performance of the business. The key focus in due diligence shall be on the experience and track record of the management team, the experience and the capability of the management team decides the future prospect of the company. It is also important to focus on market due diligence of a startup company to at least understand and analyse the total addressable market of the business.

    #96791

    Dale Deg
    Participant

    A few thoughts that I have regarding your question are, although the DD of a start-ups financials would typically show no profit, they are still important to carefully review. There might be unusual movements of monies that could show “funny stuff” happening under current management. Good and proper spending on assets and IP would be important too, since these would be factors in the valuation of the start-up. Within the financials would also be cross referencing data relating to compensation of key employees, which would help during the DD, to understand what the potential costs would be in order to retain those key employees.

    #97859

    Matthew Au
    Participant

    These are all great thoughts. From my personal experience, Start-up companies with minimum financial information require strong due diligence on the employees, specifically executive team and key talent. In addition, IP and product synergies are extremely important. For early stage products, the total address market is important to evaluate. Similar to the Polycom case, we know that it is important to evaluate the potential synergies, product potential and to have a look at cultural integration/due diligence.

    #99788

    Bianca Stafford
    Participant

    This would probably entail a focus on the registration of the start up, ie. the company secretarial aspect, the existing financials and/or projected financials and where the startup has any IP, a check on all IP.

    #102126

    Lina Lorenzo
    Participant

    Have you read the Polycom case study yet? They tended to look for small companies with an attractive product that would compliment their systems. According to their CEO at the time, a start up usually doesn’t require as much financial due diligence as the driver for the acquisition was more focused on the technology at hand and the engineering/R&D expertise at that company. They typically look at that more than financials to see if the product itself is a good fit within their portfolio.

    #102602

    Ingrid Holbik
    Participant

    Hello everyone

    Certainly some interesting comments made particularly around management and IP. From a due diligence perspective, the focus should be on the “value” and whether it resides in the IP being purchased on in the key personnel. That way you know what you are buying and more importantly how to keep it!

    Happy conversing!

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