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									  Venture Capital Transactions

Due Diligence and Post Closing
           Matters
    Columbia Law School
     February 23rd, 2004
                     Today’s Agenda
Due Diligence (DD)               Post Closing Matters
                                 Debriefing your Deals
Screening DD                     Monitoring Progress
Management DD                    Monitoring Exit
                                 Supporting your VC
Business Opportunity DD
                                 Strategic Investments-
DD on Intangibles                Working WITH your Business Unit
Legal DD                         Records & Files
Financial DD                     At Exit: M&A and IPO




     Son-U Michael Paik,   Technology Transaction Consulting
     Attorney-at-Law               qedasi@mac.com
           What is Due Diligence?
Due Diligence (DD)

Originally used in public securities offerings context; it was a legal
   obligation imposed on parties involved with the creation of
   prospectuses to use DD to ensure that they contained no material
   misstatements or omissions, so that the purchasers of the
   securities would be better able to make informed investment
   decisions.

In the VC context, the securities are issued in a private transaction;
    it is the investors who must inform themselves regarding the
    companies they consider for investment.
     Son-U Michael Paik,     Technology Transaction Consulting
     Attorney-at-Law                 qedasi@mac.com
          What’s Involved in DD?
Due Diligence (DD) involves:         •    Woodside Fund: “the thorough
                                          investigation and analysis the
                                          investor makes of a prospective
Screening DD                              investment to see if it meets the
Management DD                             investor’s strategy and criteria for
Business Opportunity DD                   funding. It includes an assessment
DD on Intangibles                         of the industry, market, business
                                          concept, management team, the
Legal DD                                  company’s technology, products
Financial DD                              and markets, and financials.”




     Son-U Michael Paik,   Technology Transaction Consulting
     Attorney-at-Law               qedasi@mac.com
      Targeted Questions for DD
Screening DD: quickly getting to core business opportunities
Management DD: assessing the quality & potential of management
Business Opportunity DD: products, models & competition
DD on Intangibles: focus, momentum, buzz and “gut feelings”
Legal DD: uncovering and anticipating problems
Financial DD: valuation is derived & negotiated through the DD!




     Son-U Michael Paik,   Technology Transaction Consulting
     Attorney-at-Law               qedasi@mac.com
                          Screening DD
                                       •
Screening DD                           •
                                            Where did the deal come from?
                                            What’s the quality of the biz plan?
Management DD                          •    Who are current & potential investors?
Business Opportunity DD                •    Who is their lawyer? Accountant?
                                       •    What’s the origin of the company?
DD on Intangibles                      •    Who are their partners and customers?
Legal DD                               •    Shopped? Who has rejected it & why?
                                       •    Are you in this market space?
Financial DD                           •    Is the company at the right stage?
                                       •    Does the company fit into your web?
                                       •    Does it compete with one in the web?
                                       •    How much does it want? In range?
                                       •    Geographically accessible & strategic?
                                       •    Is there a personal fit with the team?
                                       •    Does the liquidity strategy fit?

                                       •    STRATEGIC INVESTOR
                                            CONSIDERATIONS…
    Son-U Michael Paik,      Technology Transaction Consulting
    Attorney-at-Law                  qedasi@mac.com
                  Management DD
• Top quality management at its disposal?
• Top quality managers? Direct & Indirect…
• Top quality managers- marketing, finance,
  business development, operations, etc…
• Is management diverse and a team, now & before?
• Is it committed to long-term success?
• How does the team view you? Your involvement?


   Son-U Michael Paik,   Technology Transaction Consulting
   Attorney-at-Law               qedasi@mac.com
        Management: Individuals
• Integrity, Honesty,               • Business Judgment?
                                    • Background?
  Brilliance, People
                                    • Motivation(s)?
  Smarts, Intensity, Self-
  Confidence,                       • The Peter Principle is that point
  Committed Risk                      at which employees reach their
  Taking, Vision,                     capacity, the point at which
                                      they cannot and should not
  Ability to Execute,                 advance.
  Problem Solve, Adapt              • CEO/CTO/CFO?
  & Use Resources                   • Biz Dev/Marketing &
                                      Sales/COO/BOD/BOA?
  Effectively                       • Investors?
    Son-U Michael Paik,   Technology Transaction Consulting
    Attorney-at-Law               qedasi@mac.com
          Business Opportunity DD
• Is the product evolutionary? Revolutionary?
• What is the company’s product?
• Stewart Alsop at NEA: companies find success
  most fundamentally by “designing products that
  people want.”
• “Quality + Innovation + Smarts + Money - Pain,
  exponent 2 = Success”
• “What’s the company asking the customer to go
  through for their product to work?”

    Son-U Michael Paik,   Technology Transaction Consulting
    Attorney-at-Law               qedasi@mac.com
 Does the Biz Model Work?

                                     Markets & Customers
                                        Who wil buy?


  Products & Services             Channels of Distribution              Financial Engine
   What wil be sold?    How to connect its product with customers?     Wil it make money?
Son-U Michael Paik,                Technology Transaction Consulting
Attorney-at-Law                            qedasi@mac.com
           Competitive Strategy
90
80
70
60
50                                                                   Y-O-U
40                                                                   Existing
30                                                                   Unknown

20
10
 0
     1st Qtr           2nd Qtr        3rd Qtr          4th Qtr

 Son-U Michael Paik,             Technology Transaction Consulting
 Attorney-at-Law                         qedasi@mac.com
        Competitive Advantages
• Proprietary Advantages? In technology?
  Legal? Access?
• First-Mover Advantage?
• Does the company have a good positioning
  strategy?

• Being better and different is not enough:
  your customers must perceive this!
   Son-U Michael Paik,   Technology Transaction Consulting
   Attorney-at-Law               qedasi@mac.com
    Focus, Buzz, Momentum???
Screening DD                        • Does the company have
Management DD                         focus?
Business Opportunity DD
                                    • Does the company have
DD on Intangibles
Legal DD
                                      momentum?
Financial DD                        • Has the company been
                                      able to generate any buzz?

                                    • What’s your Gut Feeling?



    Son-U Michael Paik,   Technology Transaction Consulting
    Attorney-at-Law               qedasi@mac.com
                          Legal DD
Screening DD
Management DD
Business Opportunity DD
DD on Intangibles
Legal DD
Financial DD
After the company has been screened,
the management reviewed, the
business opportunity clarified, and
Your GUT tells you GO…
        GET A GOOD TRANSACTIONAL LAWYER!!!
    Son-U Michael Paik,    Technology Transaction Consulting
    Attorney-at-Law                qedasi@mac.com
  Financial DD: Now thru Exit…
Screening DD                        • Financial Analysis:
Management DD
Business Opportunity DD
                                      historical, pro forma,
DD on Intangibles                     IS, BS and SCF…
Legal DD                            • Variance Analysis
Financial DD
                                    • Sensitivity Analysis
                                    • Practical Analysis…
                                    • BURN, BURN,
                                      BURN…

    Son-U Michael Paik,   Technology Transaction Consulting
    Attorney-at-Law               qedasi@mac.com
                   Financing History
•   How has the company been financed?
•   How much is it looking for and why?
•   How will the proceeds from be used?
•   Projected capital requirements?
•   Prospects for future capital requirements?
•   Cap tables… the current ownership of the
    company, by type of equity, number and
    percentages, as well as the option pool.
     Son-U Michael Paik,   Technology Transaction Consulting
     Attorney-at-Law               qedasi@mac.com
                 Valuation Methods




• The Venture Capital Method: applying PE ratios to
  projected net earnings…
• The Comparables Method: what other pre-money
  valuations are currently being given by VCs to companies
  with similar characteristics…
• The QEDASI Method: negotiated, based on superior DD
    Son-U Michael Paik,   Technology Transaction Consulting
    Attorney-at-Law               qedasi@mac.com
               Post Closing

Essentially, an investor in venture
  capital must continue the due
diligence process, through exit!!!
                   “Bring-down DD”
Post Closing Matters                   Screening DD
Debriefing your Deals                  Management DD
Monitoring Progress                    Business Opportunity DD
Monitoring Exit                        DD on Intangibles
                                       Legal DD
Supporting your VC                     Financial DD
Strategic Investments-
Working WITH your Business             Has there been any change
   Unit                                  since the date of the
Records & Files                          purchase agreement’s
At Exit: M&A and IPO                     execution?
                                       Check the Representations &
                                         Warranties of the
                                         Company regularly!
     Son-U Michael Paik,     Technology Transaction Consulting
     Attorney-at-Law                 qedasi@mac.com
        “Back Office” Matters
                 Debriefing your Deals
                  Monitoring Progress
                    Monitoring Exit
                  Supporting your VC
                 Strategic Investments-
            Working WITH your Business Unit
                    Records & Files
                 At Exit: M&A and IPO




Son-U Michael Paik,   Technology Transaction Consulting
Attorney-at-Law               qedasi@mac.com

								
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