Learn more about what makes Keiretsu Forum's DD process unique! see more
Due diligence is an investor's first opportunity to explore potential investments. This is the process of reviewing, investigating, and validating investment opportunities to confirm all relevant factual and financial information.
Did you know that the due diligence process is the most important step in safeguarding investor interests? Failure to conduct proper due diligence can lead to poor investment decisions. It is in the best interest of angel groups like Keiretsu Forum to conduct due diligence as we facilitate funding.
Entrepreneur and Due Diligence Director Juan Arango created the first due diligence (DD) process for Keiretsu Forum by taking a 500+ page manual created by Michael Grounding and turning it into a functional process. The goal of Keiretsu Forum's current due diligence process is to provide members with the structure they need to make informed investment decisions. Our due diligence process has evolved steadily since its inception to provide investors with a 360-degree view of the company they wish to invest in, and our revised process ensures a complete report within 4-6 weeks.
Keiretsu Forum 5-Step Due Diligence Process
Here is a step-by-step guide of our process.
Step 1: Data Room and Team Recruitment
To begin the due diligence process, it is important to fill out the data room with information about the company and attach the specific documents requested by the Keiretsu Forum team. Without complete data, the due diligence process cannot begin. Secondly, when recruiting a due diligence team, it is the entrepreneur’s responsibility to take charge of the process. You need to keep this in mind and invite angel investors who are excited about your company and who will likely write checks. Keiretsu Forum members are experienced in conducting due diligence and know-how to handle the process. But it is up to the entrepreneur to invite the right investor to join their team. To choose the right investor, you need to talk to them and understand their investment ability and willingness. If you feel an investor is the right fit, but they are currently not investing any capital into companies, instead of trying to convince them it is advisable to look for someone else. The optimal number of investors on the due diligence team is no more than 5-6 people. You also want investors to have expertise in different areas such as finance, technology, etc. so that they can use their expertise in the DD process.
Step 2: Launch, review, schedule & ask critical questions
This stage of the due diligence process includes the launch, review, scheduling of deep-dive calls, and creation of questionnaires. The Keiretsu Forum team will facilitate this process and help resolve any issues along the way.
Step 3: Deep dive calls, transcription & visioning
At this stage of the process, the due diligence team & entrepreneur will be in regular communication through the deep-dive sessions. These calls can often last up to an hour or more and focus on what the due diligence team wants to know about the company. Members of the Keiretsu Forum team are on hand to transcribe every deep dive call. After each deep dive, the Keiretsu Forum team captures, cleans, edits transcriptions, and adds them to the "DD Notes" document, which is in a question-and-answer format. This document, also known as the first version of the DD report, is shared with the due diligence team to review and ensure all data is correct. Ideally, it would take anywhere between four to seven deep dives to get all the necessary data from the company.
Step 4: Review, approve & publish the report
As we enter stage 4 of the Due Diligence process, the Keiretsu team produces a document called a "Zero/Rough Draft", which is a combination of all the data received so far from the deep dives. The document is divided into sections and formatted for ease of reading. The task of the due diligence team and entrepreneur is to review the data represented in it and ensure that it is accurate. If any data is missing, you can add it as well. We urge everyone to use the "Track Changes" option in the document so everyone knows what changes were made to the document and by whom. Once all changes have been made and the document beautified, the document will enter a final stage called a "Final Draft" format.
Step 5: Share results
In the 5th and final stage of the process, the Keiretsu Forum team adds logos, executive summaries, Term Sheets, investor references, investment reasons, potential challenges, background checks, etc., to the final draft. We also clean up the language to make it seem like it was written by a third party and add a template to match the look of our professional DD reports.
Two additional considerations:
Weekly Status Call: We ask investors to set up a weekly status call. They can last 15 minutes but not more than 20 minutes, and the purpose of these calls is just to find out what due diligence work has been done in the past week and what is in the pipeline.
Updating Investors: Entrepreneurs send weekly updates to investors outside the due diligence team who are interested in their company. This is just to keep investors informed about progress and ensure their continued interest in the company.
Common Due Diligence Assumptions
If you have never joined a due diligence team, you may have some questions! Here are answers to some common assumptions about the process:
Does every discussion between investors and entrepreneurs count as due diligence?
Yes, this is correct! Every conversation between an investor and an entrepreneur counts as due diligence. After all, every conversation about the business might eventually lead to a potential investment.
Do checklists and templates limit the scope of work?
Yes! Checklists and templates limit the scope of the regular workflow. Professional angel investors have long known how to conduct due diligence on companies. We believe that by suggesting conversation topics, we are not utilizing their expertise. Our goal is to let investors take the lead and get answers to the questions that they are interested in.
Can an investment decision take up to 4 weeks?
Yes! With Keiretsu Forum's new due diligence process, it can take anywhere between 4-6 weeks to make an investment decision.
Are the deep dive sessions recorded and transcribed?
Yes! We urge investors and entrepreneurs to record all deep-dive sessions. We do this simply to capture important conversations, thought processes, and questions of all investors. This gives us the basis for a very solid due diligence report. For example, professional angel investors will ask 90% of the questions that any investor will want to know.
Will the due diligence team be required to write reports?
No! Our new due diligence model ensures that all conversations are recorded and transcribed. All angel investors and investors involved in the due diligence process are not required to write reports. The Keiretsu team will capture the recording, transcribe, edit and share the document with the entrepreneur and the due diligence team to clean up the language and ensure all data points are correct and all questions are answered. As a result, the due diligence team does not have to write any reports, just revise the document to ensure completeness and accuracy.
Can a due diligence report be shared?
Yes! There will be one single sharable link for the due diligence report.
Is due diligence for potential investors a sales process?
Yes! Due diligence by potential investors is considered part of the sales process. If you can talk to investors and convince them to put money into your business, it's a deal! Therefore, it is important to consider this as part of the sales process, and the central theme of all discussions should be to answer key questions from investors.
Due Diligence Best Practices
Below are some of the best practices suggested by Entrepreneur and Due Diligence Director Juan Arango for speeding up the due diligence process.
Immediately recruit investors for your team: Start by assembling your due diligence team. A team can consist of 5-6 angel investors.
Record every single deep dive call: Record every deep dive call and send the recording to the Keiretsu Forum team for transcription.
Prepare your data room in advance: Create and populate your data room so investors can easily access all the information related to your company.
Stay up to date on revisions in the Due Diligence Report: Constantly track changes in the due diligence report and answer questions from investors instantly.
Focus on key questions that need answers: Focus on the key questions investors ask so that their queries are resolved and they feel more confident writing checks.
To learn more about Keiretsu Forum’s Due Diligence process, visit here.
Karen Howlett helps investors make smart decisions to better shape their deals. see more
In the Keiretsu Forum Northwest & Rockies March 2022 Roadshow, we invited thought leaders from the angel investment world to share their expertise at the event. Angel investor, business owner, and Joylux CFO Karen Howlett joined our forum sessions in Bellevue and Salt Lake City/Boise. In her keynote, she dives into the core components that make up Term Sheets and CAP Tables to help you, the investor, make informed decisions and better manage your deals.
CAP TABLES VALUATION
Karen emphasized that the most important considerations as an investor in CAP tables are the company valuation, stock price, and fully diluted stock. According to her, different people have different meanings for the concept of fully diluted stock. It is important to know whether it includes all stock options or only stock options that have been granted or exercised. She explained that it's good to thoroughly evaluate and understand what's on the CAP table.
Why do you need to know your fellow investors?
It's imperative to know who the company's investors are, how many of them are outside investors, and how much early-stage investment is from the founder's family and friends. Also, what are you investing in? Common stock, preferred stock, notes, equity, or stock option plans and evaluate these factors before investing.
Why does a Founder/CEO stock matter?
When it comes to a founder's stock, it's important to know how much he or she owns, which is enough to keep them committed to making the company successful. What is their motivation for staying? Have they invested? Are they getting a salary? Her advice is to understand their motives.
Another strong consideration she puts forth is - What happens to the founder’s equity if the founder leaves? If it is not subject to vesting or repurchase, it will have a substantial impact on the employee stock option. In addition, having to replace the founder can have a big impact on employees' stock options. Lastly, who owns the company IP? Is it the founder, the company or a university? These are a few questions an investor should get answered before investing.
Employee Stock Option Plan
When Karen first started investing, she didn't know much about employee stock options. When she started, she put 10% to 20% into the employee stock option plan. Over the next few years, as she spent more time investing, she realized that it was essential to know what stage the company was in, how much of the capital pool was allocated, how many new employees could be hired, and how many were in the pipeline, such as consultants and advisors. It's necessary to understand where you stand in terms of employee stock options, as adding them can significantly dilute your investment. Here’s an example of how investors lose share value from the employee stock option.
Example: The authorized shares of a company are worth $1 million, and as an investor, you own $250,000 worth of shares or 25% of the whole pool. If the company decides to increase the pool size by 20%, your percentage of ownership will drop below 21% of the company. With no new money coming in, you have no choice besides stock options.
A company has $1M Authorized Shares
Investor buys $250K = 25% shares
The company increases the employee stock option pool to 20%
Investor share value declines to less than 21%
The key learning here is that investors get diluted as there are additions in the pool.
WHAT CONSTITUTES A TERM SHEET?
Karen stressed that all types of investments should have Term Sheets: equity, convertible, and SAFE notes. The Term Sheet is not a legal document and is non-binding, but it sets out the most basic terms of investment, so investors should pay attention to the content of the document.
SO WHAT’S A CONVERTIBLE NOTE?
Most convertible notes automatically convert when qualified financing is available. The financing must be higher than what they are raising now. Example: If you raise $2 million, ideally you need to convert the note to a higher amount. As an investor, you also need to know what price to convert at, the discount on the next equity round, or the discount off the next valuation cap. If the company is sold or there is a change of control, how does it affect conversion? What matters is that you have the opportunity to convert it yourself rather than getting paid off. Karen recalled that in some cases, companies were simply trying to pay off investors, rather than turning them into common stockholders, which could generate returns of up to three times as much. She believes the choice of conversion should not be a decision of the company, and you as an investor should not be forced to accept the majority in this situation, so always be aware of this fact when renewing convertible notes.
Is the maturity date of the convertible note, prepayable only with the consent of the note holder, or can companies choose to do so? Most people in the Northwest hate stocks and avoid SAFEs and convertible notes because traditional convertible notes have no valuation cap or maturity provisions. Other factors to consider include interest rates, length of the note, securities conversion, and the type of entity you wish to invest in. All of these are things to consider when reading your Term Sheet and making an investment.
For the Investor:
- Like the company you are investing in
- Invest in the team
- Trust the entrepreneur
- Plan to invest in future rounds
For the Entrepreneur:
- Be coachable and be open to feedback
- Have a clear value proposition
- Have the right background & skills appropriate for this stage
- Products/solutions that are exciting/disruptive
- Sizeable market – is it worth the effort?
According to Karen, the Term Sheet has a lot to offer, and don't miss a great opportunity when you're focused on the nitty-gritty of the documentation. She states that there was no perfect Term Sheet or prepared proposal document. One insight she offers is that entrepreneurs' responses to questions or feedback can be very revealing about how they run their business and how they feel about it. In their experience, they don't read documentation most of the time, but what matters is whether they have the expertise and are open to feedback. She continues to emphasize the importance of the Keiretsu Forum Term Sheet committee’s feedback on each deal. The Term Sheet committee consists of fellow experienced and accredited members that review each deal and provide their feedback in the Due Diligence report. If there is no feedback; you should request that feedback as it will give you the structure and guidance you need. Finally, if you don't understand something, ask questions and use the resources around you to maximize your knowledge.
ABOUT THE SPEAKER
Karen Howlett is an entrepreneur, angel investor, and CFO of Joylux Inc. She has worked for Corporate America at Ford Motor Company for over 20 years. She has been a small business owner for 12 years in the steel and construction industry. She joined Keiretsu Forum as an angel investor in 2018 and became the CFO of Joylux in 2020. As a small business owner and large international corporation, she has a solid reputation for delivering results. She is a Six Sigma Greenbelt with excellent leadership and mentoring strengths. She has proven capabilities to succeed in multiple industries and has the expertise in developing business, strategic and tactical planning, and building relationships. Click here to watch her keynote address.
#KeiretsuExit EV Connect acquired by Schneider Electric see more
The acquisition enables EV Connect to accelerate its growth, support customers and empower energy companies by optimizing EV charging infrastructure. A 10x return for Keiretsu Members!
SEATTLE, WA, July 7, 2022 – Exciting developments in the world of electric vehicles!
We are delighted to announce that Keiretsu Forum portfolio company EV Connect, a leading provider of electric vehicle (EV) charging solutions, has been acquired by Schneider Electric, a leader in energy management and automation. With a solid foundation in sustainability and electric mobility, Schneider Electric's acquisition of EV Connect will accelerate the company's growth. Along with the current management team, CEO and founder Jordan Ramer will continue to lead EV Connect's operations as an independent subsidiary, remaining focused on customer service and the company's overall mission.
"We are thrilled to partner with Schneider Electric. They not only support our strategic goals, but fully embrace the value of electricity as a transportation fuel managed by a robust and feature-rich networked EV charging platform," said Jordan Ramer, CEO and founder at EV Connect. "With Schneider we are positioned to strengthen our presence in the EV market, and we look forward to the journey as we open a new chapter for EV Connect."
EV Connect customers include businesses installing chargers, municipalities and apartment building owners. This also includes EV charging network providers that operate public charging stations, electricity providers that own or support charging infrastructure, and companies that have recently used chargers to support their EV fleets.
“I think the main thing that Schneider is bringing to us is global reach,” Ramer said of the acquisition. EV Connect’s software now manages more than 10,000 EV-charging points across North America, but in the past few months, it has begun working with Schneider in 14 countries in Europe, he said.
“At Schneider Electric, we believe that electric and digital are the recipe for a more sustainable and more resilient world,” said Nadege Petit, Chief Innovation Officer at Schneider Electric. “EV Connect has a very similar vision. We look forward to working together to accelerate the EV revolution.”
About EV Connect
EV Connect is on a mission to build a better planet by enabling electricity as a transportation fuel. Through its innovative and open charging platform, EV Connect simplifies the set-up, management, and optimization of charging stations with premium customer service, from installation to driver support. EV Connect guides companies of all sizes in managing networks of chargers and delivers a seamless EV charging experience that empowers drivers. Established in 2010, EV Connect is a subsidiary of Schneider Electric which serves customers across 41 states in the U.S., including GM, Avista Utilities, Love’s Travel Stops, Verizon, Marriott, Hilton, Western Digital, ADP, New York Power Authority, and numerous municipalities. www.evconnect.com
About Schneider Electric
Schneider Electric's purpose is to empower all to make the most of our energy and resources, bridging progress and sustainability for all. We call this Life Is On. Our mission is to be your digital partner for Sustainability and Efficiency. We drive digital transformation by integrating world-leading process and energy technologies, endpoint to cloud connecting products, controls, software and services, across the entire lifecycle, enabling integrated company management, for homes, buildings, data centers, infrastructure and industries. We are the most local of global companies. We are advocates of open standards and partnership ecosystems that are passionate about our shared Meaningful Purpose, Inclusive and Empowered values. www.se.com