success

The investment process comes with many challenges and rewards. As an investor, it's up to you to overcome the challenges and reap the rewards, but how do you do it? One simple tactic that always helps is asking questions!

When it comes to investing, you don’t just need to ask questions, you need to ask the right questions. The questions that you ask during the due diligence process can give you an insight into the companies and teams that can help you make your final decision to invest in a company.

Norman Boone has compiled a list of questions every investor should ask themselves and entrepreneurs before investing. He is an experienced leader, entrepreneur, long-term angel investor, and member of the Keiretsu Forum NorCal region. He gave the keynote address at the Denver/Boulder chapter meeting at our May 2022 Roadshow.

Whether you're investing for the first time or have been investing for years, here are some key questions Norman asks himself and the entrepreneur during due diligence and before writing a check.

The most important Question Investors need to ask themselves! (With examples!)

Do you have space in your allocation?

If you plan to invest in a new business, it is important that you have sufficient funds allocated for the investment.

Do you love the product idea?

Does it appeal to you? Do you find it practical? If the answer to both of these questions is no, you need to reconsider your investment decision. Norman explained that Northern California-based Earth Grid is working on underground tunnels almost as large as roadways, and he thinks they will eventually work with power lines, water lines, and more. This is a global opportunity as their competitor in the region PG&E (power company) has had major problems with fires on overhead power lines. Investing in the company could be a great opportunity to create more beauty and less harm to the environment.

What is the quality of management and the board?

Most fledgling companies probably don't have a board of directors at this stage of their growth. Norman went on to say that if the company has a board of directors, you need to look at how involved they are. Also, the quality of the team such as management, entrepreneurs, and core decision-makers. Norman cites the company Epilogue Systems as an example. When he joined Epilogue Systems as part of the due diligence team, he appreciated CEO Mike Graham's ability to act on recommendations and his willingness to accept feedback.

Is there an exit plan?

No sane investor wants to lose money on an investment. Therefore, it is important to assess whether the company has a clear plan and path towards an exit.

Is the Term Sheet fair?

The Term Sheet is an essential document that contains all investment terms. As an investor, it is important to understand the details of the Term Sheet and the financial terms contained within. It is necessary to read the Term Sheet frequently to ensure that you are getting the best deal from your investment. To make money from a company, it is imperative to understand the Term Sheet.

Operational Efficiency

Norman went on to ask, does the business model make sense for you? Can it be scaled? With the current business model, will the company deliver on its promises? Or do they need to change their operating structure as they grow? The more effective the business model, the more likely it is to succeed in the future.

Is the market ready for this innovation?

The market plays a significant role in the success of a company. As an investor, you want to know if this company is an attractive investment. You want to know if there is a large market for the product or service you are investing in and if that market is ready for innovation. Example: Turn Technologies is one of the companies that Norman believes has great technology and a way to connect gig workers with employers.

Competitive Landscape

Competitive landscape analysis is a proactive way to understand how a company competes with its competitors. By leveraging on its strengths, the company can make up the ground between itself and its competitors. 

Do the economics/financials make sense?

Understanding the numbers in a company's financial statements is a vital skill for investors. Meaningful interpretation and analysis of balance sheets, profit, and loss statements, and cash flow statements to identify a company's investment quality is fundamental to making informed decisions.

The impact of technology

A company's technology is critical to its success. Norman gives another example of Epilogue Systems. In his experience, their technology overwhelmed unicorn-sized competitors. He loves their management and their technology, what they do and how it makes them useful.

Here are Questions Investors Need to Ask Entrepreneurs 

The infographic below summarizes 4 key areas where questions can be asked.

Questions Investors need to ask themselves before finally writing a check

Even if investors like a company, there are a few other factors to consider before closing a deal.

• Is there room in your allocation?
• Have your questions been answered in a way that makes you feel comfortable?
• Will it help you build diversity in assets?
• Are you passionate about this company and its people?
• Will this affect your decision to proceed and the investment amount?

Final advice for all investors

Norman recalls the advice given to him by Keiretsu Forum founder Randy Williams when he joined Keiretsu Forum.

• Don’t invest in your first year – use it to learn;
• Attend as many sessions and deep dives as you can;
• Do at least 1, preferably 2 due diligence projects;
• Seek insights from more experienced people in Keiretsu;

At the end of the day, what matters to Norman is the big picture, does the company have a real possibility of becoming successful? What are the obstacles and how do they get around them? Does the company have a clear vision of what it wants to achieve? As a longtime financial advisor, Norman explained that you can only invest in what you can afford to lose. As an investor, you need to be careful and ask the right questions every step of the way.

ABOUT THE SPEAKER

Norman Boone is an experienced leader and entrepreneur. He founded and successfully sold two companies - one a financial advisory firm and the other a software SaaS firm. He is a board member of many non-profit organizations, a university, and professional associations. He also authored a textbook for the financial services industry and a variety of articles and columns. He is currently retired and is focused on consumer fairness, scaling of successful non-profits, and consulting to non–profits, and is an active angel investor. Click here to watch his keynote address.  

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.  

Starting a business can be a tumultuous experience for an entrepreneur. Every entrepreneur wants to build a business that will attract funding, scale their operations and make profits. Likewise, investors are looking for companies that promise attractive returns on their investments. So, what connects entrepreneurs and investors? Both are looking for a recipe for a start-up’s success. Is there a recipe for success? If not, what are the factors that can accurately predict a successful future for a start-up? Is it the business model? The idea? The team? Kevin Turner tells you how!

He is a long-time angel investor and Keiretsu Forum member who recently delivered a keynote speech at the Keiretsu Forum Northwest & Rockies April Roadshow. Under the theme, "Due Diligence – to write a check", he explained what investors are looking for in a company and what factors give them the confidence to invest.

So, what are the factors that make a start-up a success?

The answer to this question goes back to a 2015 Ted Talk. In a study, American businessman and Idea Lab founder Bill Gross identified the most important factors for a start-up’s success.

How do you predict which start-ups will be successful? Does funding rank as the most important factor? Or does the business model win? Bill Gross gave his prediction in order of importance:

• Timing (42%)
• Team/Execution (32%)
• Idea (28%)
• Business Model (24%)
• Funding (14%)

Timing

We all know that being in the right place at the right time is critical. When new technologies become part of the innovation landscape, their success depends on how well they help ensure that these technologies are understood by a wider audience.

Example: The apple pilot debuted in the 1990s. it was the first personal digital assistant to be produced. It was a failure, and Apple had to abandon it, not because it was a bad product, but because it was ahead of its time. In the future, the iPod and all other Apple products follow Apple's pilot. This shows that timing plays the most important role in the success of a product.
 

Team/Execution

A good team that can thoroughly implement the idea is the second most important factor. Every business needs a quality team and a good execution plan, otherwise, the business will not move forward. Some people only invest based on the team, especially if they have a track record of entrepreneurial success and multiple successful exits. A good team includes not only a group of highly qualified professionals but also their ability to respect each other's opinions and collaborate effectively to implement ideas and push the company vision forward.
 

Idea

A good idea is the third most important factor after timing and a good team. According to Bill Gross, the success rate of the idea is 28%. If you have a great idea, you can get the team, you can get funding, and you can get a lot of recognition in the market - but a great idea by itself doesn't give you huge success.
 

Business Model

A good business model is a very important strategic tool for entrepreneurship. It's not enough to have a good idea - even a good business idea can be useless if it cannot be developed, executed, and implemented. A good business model not only helps you focus on the steps needed to make your idea successful but also helps you achieve your short- and long-term goals.
 

Funding

To Kevin's surprise, funding was considered the least important factor out of the five for a start-up's success. He explained that while start-ups need funding, they don’t need it initially. A start-up needs to organize launch times, business strategy, ideas, and teams into a cohesive model that ultimately drives funding. As an entrepreneur, you might have a great product at the right time, run by a great team, and your chances of getting good funding might be high, and that's what it's all about!

Kevin follows the KISS (Keep it Simple Stupid) approach to investing
and these are his 4 predictors for a start-up’s success

Kevin’s mantra to finding the perfect company to invest in, with examples! 

 Kevin shared his experience as a member of multiple due diligence teams and the core of the investment philosophy that led him to invest in multiple companies. His investment philosophy? Invest in companies that have a positive impact on humanity. Kevin has always been passionate about investing in companies that work to create positive change in the real world, and now he has decided to go a step further and invest in companies and services that can do just that! Here are some examples of companies he invested in and what aspects of the companies led him to ultimately decide to invest.

Oisin Biotechnologies – Gene Therapy Startup

Oisin Biotechnologies wanted to be the FedEx of gene therapy. It wasn't until he became part of the due diligence team that he began to appreciate the simplicity of gene therapy. The company had a highly skilled and experienced team who together developed an elegant solution.  They have yet to identify any bottlenecks for the future of gene therapy, and based on their progress so far, Kevin thinks the future of medicine is very bright.

Oscilla Power – Wave Energy Start-up

Oscilla Power was focused on being the lowest-cost provider. They achieved this by creating an IP focused on the design of floats and reaction vehicles. They used off-the-shelf electronics to make the product as cheap as possible, saving on installation and maintenance costs compared to their competitors who used more expensive electronics. Kevin said he knew all of this because he was part of the due diligence team.

Pattern Computer – Explainable Artificial Intelligence

Kevin was introduced to Pattern Computer through a member of the due diligence team. It took him several months to understand the quality of the team and the people in the company. Since then, his initial investment in the company has seen a 20x return, and he attributes his investment decision to the time he spent on due diligence.

Kevin’s advice for investors  

Over the next decade, we will see tremendous advances in knowledge and technology as growth in both fields accelerates.  Kevin pointed out that it is currently difficult for investors to learn and keep up with technology within their area of expertise, let alone outside of it. He noted that if investors can overcome this hurdle, they can become excellent integrators, bringing together the latest technologies. He believes that every investor should develop an investment philosophy, and save money for investments. As an investor, you can choose the best start-up based on an idea you think will be successful, then join a due diligence team that will help you make key decisions and eventually write that check.

ABOUT THE SPEAKER

Dr. Kevin Turner has accumulated more than three decades of experience and expertise in the practice and business of medicine. An awarded and Board Certified, Obstetrician/Gynaecologist, Dr. Turner is an expert in navigating complex regulatory frameworks and compliance. His wide breadth of experience and expertise include the following: business management; robotics, human resources; public health; software development and integration; curriculum development; strategic planning; product development and manufacturing; and marketing. With a background in macroeconomics and technology, Dr. Turner has carefully monitored the rise of cryptocurrencies, blockchain, and artificial intelligence (AI). He is an accepted thought leader in the convergence of these technologies. Click here to watch his keynote address.