Adding Value Through Due Diligence

WUTIF Capital receives many requests for funding.  We have to be efficient at evaluating companies to determine if the investment opportunity meets our criteria for investment.

Our purpose is to accelerate the success of technology entrepreneurs through our funding and stewardship of the companies.  We believe that we provide a benefit to every start-up business that we assess through our Due Diligence.

Making angel investments is very different. Very little written material to go on. Unlike public equity markets with research on public companies, there’s little research or published material to go on.  Even private equity investors have a business track record to assess, an established market to evaluate and agreements and contracts to study.  With Angel investing there is little or no history of the investment thesis.  Few contracts or customers if any. Little management track record with the current business or of working together.

WUTIF was founded by Mike Volker in 2003 and as such was one of the first Angel funds in Canada.  Mike also was one of the founding members of NACO, the National Angel Capital Organization, an organization dedicated to the advancement of angel investing in Canada.  In that regard, NACO has sponsored the development of educational materials, the NACO Academy, to help entrepreneurs and angel investors learn and engage to foster a vibrant ecosystem of angel investment in Canada.  Through the sponsorship of Angel Forum Society the NACO Academy program module, Adding Value through Due Diligence will be offered in a virtual webinar Thursday February 25.

The process of due diligence begins the minute you hear about an investment opportunity.  At WUTIF, as our website indicates, we have a set of qualification criteria to allow an entrepreneur to self-assess whether they should seek investment from WUTIF.  There are some that are just out of scope.  We hope that we are clear on our website about what is in and what is out of our scope. however, if an entrepreneur has any doubt, why not inquire?

Once on our radar as a potential investment, we conduct our pre-screen of the company and what the terms of investment might be.  WUTIF tries to maintain a diverse portfolio of technology investments in all respects – people, technology sector and to some degree stage of company development.  Part of that pre-screen activity is a review of any Term Sheet that might be proposed by the entrepreneur.  As investors of our own and other people’s money we have a fiduciary responsibility to ensure our investment receives certain investor rights such as voting rights, access to financial statements etc. that are protected by the Business Corporations Act of British Columbia.  For this reason (and others) we are unlikely to accept term sheets for SAFEs, (Simple Agreement for Equity) or Convertible Debt financing.

Engagement in due diligence after determining that an acceptable term sheet could be agreed upon, we break the due diligence into two segments, ‘Hygiene’ factors and gaining ‘Insight’.  Hygiene factors are those that we can see and study – articles of incorporation, existing shareholder agreements, current financial statements, cap tables and the background of those who have invested previously, any contracts or agreements that are in place.  These documents do not make a company but they can break a company so we are concerned about anomalies!

Following our assessment of these Hygiene factors we set our sights on gaining Insight to the firm.  We advocate a specific framework for gaining Insight to the young business.  This framework builds on a framework called the VIRAL Pathway developed by Village Capital  (VilCap Inc.).  We know the businesses we invest in are not fully developed, that is why they are seeking Angel investment.  However young technology companies follow a very similar growth path from ideation to liquidity.  The VIRAL Pathway describes key milestones of critical business attributes much like NASA’s Technology Readiness Levels or TRLs.  The IRLs or Investor Readiness Levels define the key milestones expected at each of nine levels and in so doing define the type of investment the entrepreneur should be seeking.  These 9 levels also determine the company maturity or readiness to serve customers and as a proxy for the valuation of the company.

The process of gaining Insight is also critical to understand the support that the company needs.  We then assess who in our network might be able to support the company as investor, Board member, advisor or even key employee if needed.

Due diligence does not stop with writing the investment cheque.  Ensuring we stay close to our investee companies on a quarterly basis is critical.  There is often a requirement for a second round of angel investment and we want to be there if possible.  Our due diligence on the firm only ends with our liquidity event.  Throughout this entire process we believe that we provide much more than capital by providing insight, expertise, governance, strategic help and network to our entrepreneurs from initial discussions to liquidity.

by Kirk Hamilton, Director