Feb. 17, 2021

How to accelerate the due-diligence process? By Michael Proman.

How to accelerate the due-diligence process? By Michael Proman.

Michael Proman, Managing Director at Scrum Ventures talks about the due-diligence process and why some investors like to "take their time" while doing it. We also discuss what should founders do if an investor is already 2 months into "due-diligence" and still didn't give a definite response.


Michael's LinkedIn: https://www.linkedin.com/in/michael-proman-a2a52b7/

Scrum Ventures: https://scrum.vc/

Debt financing for startups: https://www.fundraisingradio.com/Reza-Sabahi/

Transcript

today's a guest speaker we have Michael pohlman managing director ads, Chrome Ventures and in this episode, we will talk about the due diligence process of investors.

So, a lot of founders complain that some investors like to take their time to do their due diligence and run it for 1. so, in this episode, we'll talk about why is happening how to accelerate that process and what to do.

If your investor keeps telling you that we are looking into your company, and we'll get back to you soon. So, Michael, let's kick it off by giving us some background on yourself and on scrum Ventures.

Yeah, well, thanks again for having me here. Just a quick intro. We'll start with with with with me and then I'll shift topic, over to to scrum.

So,

as you said,

managing director at scrum,

I think just from an experience standpoint of about 20 years,

but kind of seeing things on on multiple perspectives,

which I think is kind of invaluable and particular on the entrepreneurial side.

So, I've kind of sat in those chairs and been in those trenches. So I'm a little bit.

Um, you know, I guess more aware of the realities that early stage founders face and I think, you know, in general, I'd like to see more of that on the venture side because that level.

Uh, of kind of understanding will I certainly.

Uh, make for better investments and more importantly, just better relationships from portfolio support. So I started my career out in Coca Cola in their global sports marketing team, and then moved on to the National Basketball Association.

So you can kind of see a trend here. It seems to be very sports centric, so yes, my background is very sports and entertainment focused. I then started my 1st company called option. It was 2008.

Option it essentially took the idea of options in a financial capacity. Right? So the ability to to buy a consumer driven good or service, or the ability to buy it, I should say an option on it.

So we had some intellectual property there.

We focused again on high demand items, like sports tickets, and in particular contingency events and season events, high demand events and ultimately supported kind of 2 audiences.

1 was.
The rights holders,
so the team's leaks properties,
the folks who actually operate those games, and the end user,

the fans,

we ended up selling option it in 2011,

consulted to the private equity firm that purchased the company,

and then moved on to a number of other early stage companies in the sports space both is kind of a consultant as an operator and a partner in some cases,

and then found my way over to the venture side, which has been an interesting experience.

Because again, I think venture is changing as, you know, right now almost day to day and I think it's scrum. We think about those things in a very progressive way. Right? We do have funds.

We invest we traditionally invest to a.

Um, check sizes are somewhere in the half, a 1M to a 1M dollar range. We've made about 8586 portfolio investments over the lifetime.

And we, we don't lead rounds. We, we are Co, investors and so all of that on its face, kind of sounds very, you know, I wouldn't say status quo, but very Bay area right? A, you know, it's hard to differentiate.

I just described, we get kind of our unique identity in a few different ways. Number 1 is through our base. Right? So, they're large Japanese corporations that are limited partners and our funds.

And then more importantly, I guess, I would say is that how do we support those in kind of, I would say value added ways. And so.

Initially when it was conceived, it was probably seen more as a side hustle. Right?

So, working with our helping them, connect with high quality companies, but less from an investment lens, more about top line growth and Biz dev, purposes rights are kind of playing the role of of curator.

And ultimately, that was aside business called scrum studios. Initially,
we started working in gaming with Nintendo,
we worked with Panasonic,

and then ultimately broaden the portfolio a couple years ago with a pretty large scale program with Dentsu and a number of others,

soft Bank of Tokyo corporation CBC,
etc in which we again focused on the sports and entertainment vertical. That's kind of where I was brought into the company.

Uh, and aggregated what we would look at is kind of not an accelerator, but a large scale community of stage, agnostic startups that wanted access to this growth market, wanted access to revenue generating opportunities.

And then we were kind of the liaison to that. So, scrum studios has evolved. We're now working in a smart city capacity. We're doing stuff in food tech. We've got a number of other initiatives ongoing. So, 2021 will be a big year.

I think again why do we do what we do? It's not a distraction from the fund, but it's ultimately a way for us to connect with a very, very broad array of companies. These programs that we execute. They're not your traditional accelerator right?

61012 companies with food tactics. 85 with.

Smart city, it's 95 companies sports tech it was 159 and these are coming from all around the world. Right? So we don't take equity in these companies, which is kind of unique.

We don't require any type of relocation we're not asking for a disproportionate amount of their time, but what we are enabling and providing them is again access to, to growth opportunities, particularly on the top line.

Uh, and so it's kind of refreshing, I think, for founders, because it, it gets back to kind of strong fundamentals, product, market fit and things that are going to be certainly needed to raise those growth rounds.

Before we move on to the next question actually, we wanted to follow ups on this part that you mentioned that you don't ask for equity. Can you elaborate a little bit.

Yeah, I was about to say, yeah, we do get paid so I was shocking right? So, you know, and we're not taking money from the Kitty. That is our fund. So, everyone's like, scratching their head now and probably thinking, like, okay, how does this work? Is this even legal?

And so the truth is we work with numerous corporate partners in Japan right? And so very similar to a consulting engagement, say with Mackenzie or a bank, they are helping underwrite these programs. Right?

So, we have no financial liability and because of that, we don't have to ask for equity from startups by not asking for equity. It also enables us a couple things. Number 1. it's a very 2 way conversation. Right?

And we get to really learn about these companies in you and in different ways,

I would argue that this is the best kind of non traditional diligence you can possibly have is when you get to know companies when there's no expectation on either side in terms of investment,

but it's really about pure growth and you can kind of see them in action and they can evaluate you to. And so we use these programs on the studio side as you can probably imagine.

Really as a pipeline in kind of deal flow for a lot of the, the investments that we're making on on the primary side of the business.

So just 1 last clarification basically.
Uh, your Japanese partners covered those expenses, right?

Yeah, I mean, non dilutive support from of interest to you to those start. Correct? I mean, again, they, they are, they are trying to connect with companies that can help address pain points or opportunities in their business. Right?

And that is a transaction as you can probably tell, we're providing kind of curated suggestions, recommendations and access to this network. They're providing the opportunities and we're kind of that middle layer. So, yeah that's very cool.

That's experimental. I absolutely love it.

So,

before we move on to the major topic of today's discussion,

which is due diligence by venture capitalists 1,

more question about something that you mentioned earlier,

which is that you're focused on just pure growth and 1 thing that you told me on our Pre call is that 1 of the most important things for a founder to understand is his or her audience.

So the audience of their startup in your and you're saying, what does it mean to understand your audience? Yeah. I mean, it's more than just looking at scrum and being, like, okay, who have invested in.

Um, I, I can't tell you how many times I get inbound it right from from, uh, startups that are just looking for capital and it's just, you know, there's no thoughtfulness that goes into it.

Right, I think the number 1 thing is, is, you know, know who you're talking to right. Know that I'm an operator that I have that experience. No, my network, which is pretty significant, I would say in particular areas.

And so, rather than just going in, and giving me the sales pitch, whether it be on funding or otherwise, recognize the fact that this isn't don't just treat it like, you're asking the bank for alone or it's.

Walk in there and with maybe an expectation of impressing me and and and ultimately saying, hey, listen.

If I can just tap into your network that is value too right? And then get to no, I mean, it's a longer term conversation.

I know some people are getting term sheets overnight, in some cases, and we move quickly. I would say, but, at the end of the day, it's I like developing kind of real authentic relationships.

And so if people can understand the value that we bring, and in many times that value is not the checkbook, we're not going to check in those rounds. Right? We don't lead rounds.

Yes, we rewrite sizable checks and it's all relative. Right? But I think arguably our biggest asset is how we support our portfolio.

And what's interesting is if people just ask me for an intro, even if we have no equity in accompany or I'm working on this. What do you suggest just ask questions like that? I'm more than happy to do it even with no equity or skin in the game.

Um, again, I find that the best conversations and the best investments for that matter are ones in which I can get 3rd party data points from. So, it's even in my benefit.

To help them connect to opportunities that may or may not ultimately materialize, but ultimately provide some really good feedback and data points that we can evaluate.

We do like the idea of traction. I think that that's an important kind of attribute for a lot of companies,

particularly at that stage.

You have to demonstrate strong product market fit and, you know, it's that's the easiest way to kind of be selective because a lot of these companies just fundamentally don't have that.

Mm, right so now that we've covered that as well.

Let's move on to our major topic. Yeah. What is the key thing that you don't like when venture capital is thrown there? The Jewish process so, in their normal standard due diligence process what are the major points that you really don't like?

Yeah, well, I think again everything's changing. I think if we had this discussion 2 years ago, it would be a very different conversation. And I think that's just you could blame coded but I don't think it's just covert.

I just think in general, they're, they're kind of been some healthy corrections that have gone on, in the process. I think vc's, in many respects are becoming more versatile. Right?

It's not just about bringing in some ex finance or investment bankers to go scout some early stage companies and write some checks. It's about how can we help operationally? So you think about the traditional venture.

Um, the 3 essays of of sourcing screening and supporting.

I think the, maybe kind of 2 years ago, and even to a certain degree today, the traditional approach is typically like a 40 4020.

Um, especially amongst Co, investors for people who aren't taking board seats and leading rounds in terms of time allocation that 40 4020 split. We're a little bit different, strong.

And, you know, I think that this is a healthy thing again, we cast a pretty wide net. Right? So so we're probably if you wanted to kind of go back to those percentages of sourcing screening supporting, we're probably more like a 501040.

I got to make sure that adds up to 100 here. My math is really bad, but last, but, yeah and so what that essentially means is we cast a wide net, right?

We're looking kind of tech agnostically so we're not just, you know, deep tech investors or sports tech investors or this, or that. We're looking for transformational type of opportunities. Right we're looking for founders.

That are somewhat aspirational.

But at the same time, have a proven track record, or have, you know, kind of strong credentials from their previous experiences we're looking for founders and companies that.

Are reasonably valued and then, of course that are in these kind of high growth verticals and so that kind of goes back to the 50%. And some of that deal flow, as I said before, comes from our studio initiatives, which is super helpful.

I would say that, then there's a pretty sizeable drop off right between the companies that we try to take a look at and the ones that we actually moving to true diligence on and that represents that 10%.

So, when we start diligence companies, it's kind of like, hey, listen, this is this is super interesting. We're not going to waste our time, because we do spend a considerable amount of time on the diligence phase.

Internally,

the work that goes in the thoughtfulness,

the reference calls,

everything that kind of gets us to a decision and then let's say,

we do invest in that company again,

we don't take board States.

We're probably a very small portion of the final round itself in most cases, but the amount of support that we're providing our portfolio is kind of punch above our weight. I would say on that.

And I think again, that's just kind of a trademark of how we're.

Comprised as as an organization, we have people that come from diverse networks, communities, different areas of focus, skill sets. And I think ultimately, that's where we look to kind of.

Create more street cred is the ability to support in a meaningful way. We know that founders are kind of always resource constrained, whether it be cash or actually people and we know that it's more than just lobbing in an intro here.

And there, it's, let's roll up the sleeves. Let's kind of kind of be worker bees so to speak with our portfolio because we ultimately know that, you know, at least we believe if you're not all in on the companies.

And when I say all in, I mean, you know, being able to kind of, I guess, commiserate with them and understand the highs and lows and how to get them to better places.

It's like, why even writing a check in the 1st place if you can't add any value I would say you're probably making the wrong investment. So that's kind of how we look at the world as far as how we operate and work with startups.

Yeah, does that answer your question there? 100% and I feel like you should definitely meet shortly from Ventures because she was telling me exactly the same thing.

Just yesterday that if you're not fully committed to company what's what's the whole point of the start thing then why do you even do this go to private equity? Like, getting the public markets?

So and sorry to cut you off there, but I think you just met, you nailed it right? I mean, I think private equity has gotten a really bad rap over the years. Right?

Because just generally speaking the industry just pumps a lot of debt on the balance sheet and then just tries to spend something off. And it doesn't seem very genuine.

But I think there elements of the private equity approach that are super interesting, and could be applied on the venture side. And some of the stuff that we're already doing right.

Is that could we in some cases, it insert ourselves into the team on a more operational day to day level right? Kind of add value and gain kind of invaluable layers of Intel by way of doing.

So, and so I like that personally, I love the ability to not just write a check, but also.

Like, have established, kind of that we need to achieve with that company and and take some, some deep levels of accountability now obviously with that comes opportunities to to diversify revenue

streams. Right?

I mean, as you can probably guess, you know, we take a management fee just like every most funds I should say, but are there ways to kind of bring that revenue stream more downstream?

Um, you know, so to speak and localize it at the company level, and those are all things we're exploring and I think that.

The future adventure right is that it's not just about the 2 and 20 or 2 and a half and 20 model and writing checks and hopefully something hits.

It's about kind of what are those side hustles that you have and not so much? It kind of sounds derogatory, but like.

You know, the side hustles in some cases are not only going to be your differentiating qualities as a venture firm.

But they're also going to probably support the overall objective and that's ensuring that the portfolio is successful.

Mm, hmm right, right, right, right, right. So.

1, more questions on due diligence process, specifically, from the founder perspective, let's say, does founder is dealing with a venture capitalist that is reviewing their company and is telling them, you know, run our due diligence process and has been already a month.

And the founder has no idea what's going on.

How how can founder accelerate this process of due diligence when reality most likely is just an investor just waiting to see who else choice around. How can founders deal with this stuff?

Yeah, I mean, again we try not to start diligence on companies, unless a lead investor has already been established. Right? And because for that exact point, it's not in our best interest.

To start,

poking and prodding and asking questions and being a here,

unless,

you know,

we're ready to write a check and the only like,

prerequisite we have in most cases are have you established a lead investor or is there an actual term sheet?

Right. And so I think this is a 2 way street right? vc's 2 founders.
To be thoughtful and responsive and all of those things, but at the same time.

You know, founders need to understand, like, how do I sequences? Right? Like, do I know that scrum is probably not going to write a check until I've already established a leader? I have a, you know, somebody's already drafted a term sheet right?

That's probably the case. Right? So, I put people in positions to kind of be accountable, I would say, is kind of my 2 cents of advice.

You know, we're going to be very thoughtful about that too. We're not going to we're going to be very upfront and say.

Certain things, we're not going to go down the road and then be like, hey, I'll give you a call back in 2 months, because in some cases, right the lead investor may be the, the thing that pushes us over the goal line or the thing that tells us not to invest in some cases, right?

So we need that layer of intelligence to make a qualified decision.

In those in those situations, I mean, there might be companies that we speak to right in that sourcing phase that are really early on.

Um, and and look at the of those conversations, kind of, it's not going to be 1 conversation. Of course. Um, so so let's make it succinct. Give me what I need.

Understand, let me know where you're at in the process. Have you established a lead, have you not would you like a few recommendations on folks that we've worked with? Are there other ways that we can be supportive and helpful to your business?

I mean, honestly, I look at kind of intro calls with with startups as.

You know, to be honest, it's more of a benefit to them than it is. Also. In some cases, I'm hopeful that a founder will walk away from that call with maybe 3 new biz dev leads that are going to get warm introductions to.

Um, and potentially a few other recommendations on the race side.
And so we look at a lot of those things is kind of what I hate, equating it to, like, office hours. But, like.

We're willing to give our time. We do that because we believe in, you know, establishing longer term relationships with founders ones.

That don't seem very transactional because and then we'll go get pitched in and in a very transactional way and it'll rug people the wrong way. Right. And so there are vc's out there.

I don't want to speak for the whole venture community right that it is transactional and it's like, come at me when you're ready and ready to go and.

Bam, and then there's, there's kind of us it's like, hey, listen, I want to get and I get to know you I want to.

Um, help you right? So that, even if we don't write a check, you can at least walk away from the conversation and being, like.

Hello, we just got, you know, this was really, really kind of valuable, uh, in other capacities beyond just, you know, fundraising.

Right and yes, hopefully every single founder after a conversation with the venture capital is like, they did not invest, but at least they gave me real good feedback.

Moves me forwards so on base positive notes a, let's talk about something else. That's really positive, which is alternative to venture capital money. So I appreciate your call. You mentioned that.

Sometimes you actually recommend founders to go out and look for alternative sources of capital, other than angel investors, or if he sees. So, could you name a few that to you would highly recommend to those especially early stage founders.

Well, I think 1 thing that gets overlooked a lot is debt capital. I mean, it depends on what kind of business you're in, right?

If you're raising capital to go buy up components or this, or that venture might not it may sound like the right approach, but it may be absolutely the wrong approach. Right?

I mean, given the debt markets right now, and given how low interest rates are, you may be better qualified there than than anywhere else. Right?

And I think there are other ways of, of looking at, you know, why do you need to raise capital? You need to do it because you've got to keep the lights on.

I need to do it because you're, you're essentially feel like this is the role of a startup. I'm always in res mode. I think you have to 1st ask yourself.

What are the real needs and then we look at those needs and then, you know, draw a conclusion of what's the right outlet for those needs and how long can I prolong a runway?

How strategic do I want to be? Right? I mean, it's so much dumb money out there right now.

If if the end game is just about putting more more coins in the bank I mean, I'm sure you can achieve that. If you're willing to give up a certain percentage of your company.

But I would really strongly encourage people to think about the money. Think about where it's coming from think about it in some cases, where are you going to put that money to work?

And those are kind of signals in my mind of of a healthy company versus 1 that is just kind of a follower and looking to do things in a very status quo way.

Right, right, right, right, right. And yes, that is absolutely great. To be honest. And yes, you're absolutely right. A lot of people completely ignored because, you know, startups that's not for that. That's where he sees. That's not exactly how it works.

So, I'll make sure to include a link to a really cool app is a, with the. I believe it was white vice president of Wells Fargo so.

If you're curious to hear more about that financing and how it can apply to your particular situation definitely. Check out the description of this episodes. The link is going to be there. And on this note, we are moving on to the last question of today's app is a, which is a call to action.

So, Michael, what do you want to only started to do? Right after the episode is over.

Probably drink heavily. I don't know. I mean, at this point yeah, I, you know, I don't have I'm not the guy who stands on a soapbox and tries to to provide wisdom and advice.

Although it may have sounded like it for the last 20, some minutes again. I would really. Look at a couple of things, right? Everybody is really focused you at least you need to be. When you're just getting started, um.
But I think 1 of the big things for me personally is is looking at kind of what is the.

What is kind of the next 6 months look like and then what's the next 12? And then what's the next call at 24 to 36 months?

Provide a vision that is realistic, but at the same time, potentially aspirational, right?

It shows kind of how this is going to take over the world, but don't get caught up in that vision. Right? I mean, you need to execute right? Like, day to day, hour to hour, to be able to kind of establish that.

And so what I mean, by all this is, is that, you know, showcase for me, it doesn't have to be massive. Right? It could be it could be small partnerships.

That your product that your company can diversify.
I know everyone is so hyper focused on be targeted, be focused. Do all this, like.

And I get it right you only have so many races, or says, you can't be scattered. That looks bad. You're all over the map.

But, you know, if covered is is kind of.
Taught us anything it's created some significant barbells and venture right? Is that.

You know, you have the winners and you have the losers. There's not a lot of companies that are kind of in the middle. I would say you're either on 1 end of the spectrum or the other.

And, you know, and that's to be expected our portfolios a reflection of that.
We've had some outstanding performance in our portfolio in the last 12 to 18 months,

because the companies have either been able to address real societal issues that have been brought on by cobit or they've been able to pivot.

And I think just.

It goes back to what we look for in founders we look for founders who are dynamic who have diverse experience who have diverse networks, such that they probably know ways to establish revenue in diverse ways.

And so talk to me about that.

Talk to me about how yeah this is going to be relevant to the health and wellness industry,

but,

you know what I see aging as a major pain point in certain markets,

and we can address something for seniors right?

That this can be both kind of a B2 B and a B2 C model show me those types of invasions.

Maybe, it's a small scale proof point or pilot that demonstrates that we're not always going to be like, hey, we need to see 10M a, our type of things to write a check or even a 1M in some cases.

Although that would be nice. What we do need is validation and traction. And again, if you can demonstrate that in a diverse way.

Um, numerous industries, we're, we're in many cases that helps us do risk.
A lot of the investments because investing is is kind of like, you know, it's all about kind of avoid the

landmines right and D risk as much as you can.
I mean, that's the 1 thing I have learned kind of why you hire lawyers right?

You know, they're, they're basically to make sure that they mitigate risk and if we can establish an ad and you can, you can show me that this is not risky. And that this is high growth. Then we're onto something.

So just think about kind of think about that, think about.

You don't want to be the, you know, 8 or 9 out of 10 investments that don't pan out for this VC. You want to be the, the 1 or 2 that you go on to be unicorns and so how do you help establish that level of trust?

Right at the beginning of the conversation.

Right. Perfect. Absolutely. Love that demonstration of validation and traction in a really diverse way. This is super interesting and yes. Super useful. So we're going to wrap up the app. So here my call to action is going to be go to the description of this episode.

I'll make sure to leave Michael's and also link to scrum Ventures and also link to that episode that I mentioned earlier about.

That financing for starts, and by the way I double checked, it was.

Managing Director of Wells Fargo, not vice president. So do that check out the descriptions his episode. And as you usually have a date.