You may have heard many times about due diligence in the investment world. A good due diligence process ultimately becomes the deciding factor in whether or not to invest in a company. It also lays the foundation for smooth integration.
But what is personal due diligence? How is it different from Keiretsu Forum’s five-stage due diligence process? How is it done? And why is it absolutely necessary?
Keiretsu Forum member and investor Mark Kerschner sheds light on the topic. He has been investing since 2017 and has made 11 investments since then. Here is his 5-Step Due Diligence Process.
5-Step Personal Due Diligence Process
1) Understand your strengths and weaknesses
Mark says the first thing to consider when you start investing is understanding your strengths and weaknesses. He explained that his experience in different financial roles in various countries helped him see things from a different perspective.
If you're an investor in a company's due diligence team, and you have a solid understanding of its industry, use that knowledge to drive the discussion forward. Alternatively, if you're on a due diligence team and feel like your knowledge is not relevant to the sector, ask yourself who you can add to the team to better comprehend your questions and challenges.
Evaluating your position in the due diligence team is the first step. During due diligence, you should ask yourself: What am I bringing to the conversation? How can I use my strengths? How can I overcome my weaknesses?
2) Do you know why you want to be an early-stage investor?
Mark says there are many different reasons to invest, and every investment will put you down a different path. It's important to ask yourself, he continued, why are you investing in a certain type of business? Is it because you want to support environmental and social causes? Is it because you are rich and want to give something back? Is it because you are a capitalist and want to support young entrepreneurs?
Investing in early-stage companies can be extremely advantageous to investors. Investing in a start-up from the beginning benefits investors as in most cases it leads to significant returns. Investors can work alongside the higher-ups of the company, give their input, and make instrumental decisions for the success of the start-up. Investing in a start-up can also be very risky, but if successful, the rewards will exceed the initial capital provided. Knowing this and then starting your due diligence with a company that fits your investment appetite is a crucial step.
3) Determine how much you are willing to lose?
The hardest idea is that you have to accept that you can lose the amount you invested.
As an investor, you must accept the risk factors of investing in early-stage companies and know that the chances of a significant return on your investments are slim. Mark recalls getting the same advice from another member of the Keiretsu Forum: " Never forget that early-stage investments are very high risk."
Only invest in what you are willing to lose! Mainly because the risk is so high that it takes a lot of work to look at a company profile before investing, especially if you want to reduce and/or eliminate risk as much as possible.
4) Determine your time horizon
Are you planning for a liquidity event in 3, 5, or 10 years from now?
Time horizon is important because it is an important factor in determining whether an investment is suitable for an investor. It is also a crucial factor in determining the level of return on investment. The longer the investment period, the higher the potential return. As an investor, you need to consider your age, income, lifestyle, and risk tolerance before investing. Mark noted that he often finds that liquidity time frame expectations do not always match reality. Liquidity events are often delayed, and as an investor, you should always consider a delay in this process when investing.
5) Create a checklist to set yourself up for success
Join Multiple Angel Groups: Mark shared that if he could go back in time and start over, while also being part of other groups, he would make Keiretsu Forum his primary angel investor group. For example, he is currently part of Atlantic Bio Angels, as his investment interests continue to be drawn to therapeutics and medical devices. Joining multiple angel groups can be a great learning opportunity, especially when you notice the qualitative differences between groups, and learn from other investors’ insights, backgrounds, and perspectives.
Embrace the power of Mindshare: As an investor, it is important to be part of a diverse group and harness the power of mindshare. This is where you learn the most, especially about yourself.
Get to know fellow angel investors: Nothing beats some old-fashioned networking! Whether you're a seasoned angel investor or new to the game, there's always something to learn as you meet and build relationships with your fellow angels.
Invest with patience: Invest patiently! As an investor, you may be happy to invest in the first company you come across, but the truth is that rounds always come and they don't always end tomorrow. You need to spend several rounds of due diligence to really vet companies and understand them.
Participate in Due Diligence: Mark remembers that the best investments he made were when he was involved in the due diligence process. It gives you the opportunity to have professionals who understand the company or other parts of the industry, have a different perspective, and really study the company in depth. The due diligence process can also give you a complete picture of the company you are considering investing in.
Ask questions to the CEO: You can spend time with the CEO and get to know what they think. Do they stick to their cause, or are they willing to accept outside opinions? Will they listen to the board or advisory committee? If you are not on the due diligence team, he recommends that you still make sure to have multiple conversations with the CEO.
Speak to the Advisory Committee:
Meeting team members along with the CEO is also important. If a company has an advisory board, call them and ask to meet with them. Ask how involved they are and how often they are involved in what's happening at the company. Due diligence, while very time-consuming, creates the greatest chance for success.
Conduct a site visit: Visiting the site and really getting to know the company can be time-consuming, but it is a very important step before making any investment.
Winners & Losers in Investing (With Examples!)
Mark shares some examples of companies he has invested in, and looking back at his past investments also gives him a chance to see where he's made the right decisions and where he's gone wrong.
Example 1: Company XYZ
Mark’s relationship with the company:
- A Keiretsu Member called about an opportunity
- Technology company, his bailiwick. “Company has great technology”
- Spoke to CEO who seemed knowledgeable about the space
- Impressive deck
- No Due Diligence or Mindshare
- No site visits
- Invested the lowest amount
Mark said it was one of his biggest mistakes. Another Keiretsu member who brought him to the company reminded him that it takes 22 investments to get a 2X or 2.9X return. Mark regrets that he did not conduct a thorough personal due diligence with this company and he did not enjoy the benefits of participating in mindshare and a due diligence process with the team. As a precaution, it's one of his lowest investments, and it's one of two that are currently hanging by a thread. He said he would not have invested in the company if he had taken the time to research it further.
Example 2: FEMSelect
Mark’s relationship with the company:
- Watched a 60-minute clip on the plastic mesh disaster in surgery
- Witnessed FEMSelect in an Angel Investor Fair. Fellow BSA members explained how open the relevant markets are
- Multiple meetings/talks with CEO, with a final meeting in New York
- Reviewed all available materials about the company
- Reviewed Keiretsu Forum's Due Diligence report and saw an updated presentation
- Stayed in touch with management
FEMSelect is a company that Mark has invested in through Keiretsu Forum. He recalled watching a 60-minute presentation on the disaster of plastic mesh in surgery. He spoke to the CEO multiple times, reviewed materials, called company employees and associates, and even reviewed the Keiretsu Forum due diligence report. FEMSelect is currently in the commercialization stage, is starting its VC round, and is well on its way to profitability. Mark is very happy with his investment and praises the research that helped him get ready to invest.
Example 3: Seneca Therapeutics
Mark’s relationship with the company:
- Two-hour discussion with the founder’s advisor
- Lunch and four-hour discussion with founders and advisors
- Personal research - what is an oncolytic virus, patent protection, etc.
- Initial Investment
- Keiretsu Due Diligence Team Member (investment disclosed)
- Ongoing dialogue with founders on how to strengthen the company
- Secondary investment
- Invited to be a Board Member
- “Volunteered” to become the company CFO
Mark took a 2-hour train ride with a member of Keiretsu Forum and one of the advisors to the founder of Seneca Therapeutics, where he had the opportunity to briefly learn about the company. He found the experience interesting and ended up organizing a personal follow-up meeting with the founder and advisors, which lasted 4 hours, through which Mark was able to learn about areas he was unfamiliar with. Mark started researching oncolytic viruses and patent protection and eventually made a small initial investment in the company. The company then presented at Keiretsu Forum, and after Mark disclosed his investment in the company, he worked on the due diligence team and got to know Seneca's team very well. After making his second investment, he was invited to join the board and eventually volunteered to be the company's chief financial officer.
Mark's advice to investors is to do personal and team due diligence before you start thinking about investing in any company.
ABOUT THE SPEAKER:
Mark Kerschner is an Angel Investor, Advisory Board Member, and Board Member. He began his career with PWC in NYC and has been a CFO of both public and private companies, working in the chemical, engineering, and pharma industries. Currently, he serves as a Board member and CFO of Seneca Therapeutics, Inc. He is an active member of the Broad Street Angels, Mid Atlantic Bio Angels (MABA), and Keiretsu Forum. Click here to watch his keynote address.