Finding capital for startups is certainly a challenge—and for investors, finding the right deals proves difficult, too. That's why, in a recent survey, the majority of regional investors responded that they'd like a better way to conduct due diligence on investment deals.
The study, conducted by the Alternative Investment Forum (AIF) and KCSourceLink of 41 well-known regional venture capital funds, high-net-worth investors and family investment offices, revealed that almost two-thirds of respondents would like to see a standardized due diligence process.
"One of the major findings of that survey was that new investors don’t know how to properly investigate deals. Based on this finding we decided to do a follow up survey at the end of 2016 of professional investors, who do this for a living, to see if there was a standardized due diligence process,” said Mark Meyerdirk, one of the founders of AIF who led the task force that designed and distributed the survey.
The survey comprised 32 detailed questions focused on how professional investors evaluate venture investments. It concluded that these investor were generally spending from 20 to 60 hours conducting due diligence for each venture stage investment opportunity they consider. It also cataloged the processes and tools the professional investors use to collect the data.
96 firms from a 200-mile radius of Kansas City (including St. Louis, Wichita, Omaha and Columbia) were invited to participate and 43 percent, including participant from each of those markets, completed the survey. A majority of the firms surveyed reportedly use professional internal staff to conduct this work.
Some of the more common steps cataloged in the survey included vetting the target company for data on the management team, reviewing legal and financial details, analyzing intellectual property, reviewing the competition in the industry and determining a business valuation.
The survey concludes that there are clear similarities in the processes for conducting due diligence by these firms and in the types of data they collect. It also suggests that some in the investment community are interested in outsourcing due diligence work for the more common and standardized data they need.
“Insights into what investors look for helps us educate both investors and entrepreneurs to create a better process for accessing capital in Kansas City,” said Maria Meyers, executive director UMKC Innovation Center and founder of SourceLink.
“AIF and KCSL are non-profit organizations dedicated to supporting the regional entrepreneurial community by educating entrepreneurs and investors in this space so that more and better deals succeed. Just think how helpful it would be for the founders of these great new companies and the investors who look at hundreds of deals, to have some standard report to start with. Most other industries have this type of service, why not venture capital,” added Meyerdirk.
AIF and KCSourceLink plan to create a “Venture Stage Due Diligence Report Template” based on the data secured from the survey and share it with interested persons in the venture capital community and entrepreneurial ecosystem.
A report of the conclusions reached by AIF and KCSourceLink from the survey as well as a link to the survey responses and the names of the firms who participated in the survey are available at: Full AIF-KCSourceLink Due Diligence Survey Report.