a due diligence study

A Due Diligence Case Study

The following presentation was captured from fictitious member notes of a “diligence check”, often referred to as “due diligence”, on what could best be described as a well known but fictitious enterprise (company).

The due diligence team researched and reported on the enterprise’s market opportunity, product, intellectual property, competition, financials and management, with a recommendation for investment for the group.

This case study is offered as a teaching tool that describes the minimal themes of a due diligence check (keywords bold and italicized ) and will hopefully prepare perspective companies for such diligence checks in the future.

A Due Diligence Case Study©2010 Tech Coast Angels

A Due Diligence Case Study© 2010 Tech Coast Angels 1

Executive Summary

This enterprise has over 300M potential subscribers that generaterevenue in excess of $2T (yes, trillion dollars!) per year. They have

a unique product that so far has been unmatched by the competition.

There are barriers to entry to competition and the intellectualproperty of this enterprise in terms of human and technicalcapital is enormous.

The future should be extremely bright for this enterprise.

That said, management’s spending is outrageous. Even with $2T inyearly revenue run rate, management is running a deficit, takingon huge debt and delivering less quality service to subscribers.Many independent projections show this financial path to be unsustainable.

We invest in teams, and after many long meetings with this team,we can’t get them to recognize their problems and address them.We find this team to be un-coachable and therefore recommendnot investing in this enterprise in spite of all its positive aspects.

Details follow…


Market Opportunity

* 300M subscribers with many more expressing interest tohave access to services

* Expanding subscriber base, both organically andadditionally via new subscribers moving into geography

* Grouping of subscribers into 50 semi-autonomousgeographical regions, all forced to use services (a moator fence)

* Large resources available from geographical regions:human, natural and intellectual

* Region, as a whole, has goods and services exported allover the world

In Short: Large market opportunity that fences outcompetition with growing subscriber base for services.


Product

* Product is “services” paid by subscription fee

* Services include safety services, infrastructure, health,education and other common services, some required,some seen as entitled by subscribers.

* Product fulfills basic wishes of subscribers but there aremany potential areas of improvement; product seen asunique

In Short: Product is a service-based business thatsatisfies basic subscriber needs but has many potentialareas for future improvement.


Intellectual Property

* Large base of human and technical IP (intellectualproperty)

* Subscriber of service being the single largest IPcomponent: extreme “network effect”

* Research and development rarely matched in breadthand depth

* Educational/training: although not perfect, suppliesongoing potential increase in subscriber base (and fees)

In Short: Network effect among subscribers and largehuman and technical IP; probably unmatched bycompetition.


Competition

* Competition is abundant but switching costs are highdue to geographic boundaries

* Competitive services are collectively worse with some individual services more enhanced

* Competitive subscription fees are clearly inferior:generally much higher fees for equivalent, and in a lotof cases, more inferior service

In Short: Competition is numerous yet high switchingcosts due to geographic boundaries essentially “fence out”competition.


Financials

* Good news: Graduated subscriber fee - subscribersgenerally pay more for services based on income;over $2T yearly revenue!

* Bad news: management spends over $2T and may doubleexpenditures in coming years

* Bad news, II: in addition to deficit spending, management is taking out loans with interest that willin the long term be unsustainable given financial model

* Bad news, III: management is taking loans from thecompetition!!!!

In Short: Given a rational expenditure plan, managementcould be turning profit and paying down existing debt.


Management

* Management is in turmoil: two camps, both of whichwon’t address spending issues; just finger pointing

* Gridlock: no real formal plan for future, no rationaldiscussion or coordination for controlling spending in conjunction with subscriber fee increases

* Due diligence team, after several meetings, could notget management to a) admit there was problem orb) come together with a coordinated plan to fixproblems

* Due diligence team feels this management team isun-coachable, they will not take reasonable input and

address, or even admit to, obvious problems.

In Short: Fractured, un-coachable management. Pooror no planning, no product or financial future roadmap.


Summary

* Unique product

* Large growing subscriber base

* Great revenue stream but spending/debt to match

* Large barriers to entry

* Good competitive position

* Un-coachable management team which makes this dealnot an investment option

For more details see: Wikipedia U.S. Budget 101

http://en.wikipedia.org/wiki/US_Budget

Who are the Tech Coast Angels?

Tech Coast Angels, www.techcoastangels.com, the largest angel investor network in the United States, provides funding and guidance to more early‐stage, high‐growth companies in Southern California than any other investment group. Since its inception in 1997, TCA members have focused on building valuable companies, personally invested more than $100M, and helped portfolio companies attract more than $1B in additional capital, mostly from venture capital firms.

TCA members give companies more than just capital; they also provide counsel, mentoring and access to an extensive network of potential investors, customers, strategic partners and management talent.

TCA has more than 300 members, including its venture capital affiliates, in five networks in Los Angeles, Orange County, San Diego, Westlake/Santa Barbara and the Inland Empire.

A Due Diligence Case Study©2010 Tech Coast Angels

http://www.techcoastangels.com/

a due diligence study

Economy & Finance