Due Diligence

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• Due Diligence
• UALR Presentation for Course
• Financing Entrepreneurial Ventures
• April 8, 2003
• Dr. Ron Goforth

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A Basic Business Premise
The commercialization of inventions,
services, or products requires investment.

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1. Assuming that the Premise is correct,
what do investors need?

• They need (or want) to know
• How much money what will it be used for?
• What will be the return on the investment?
• What are the exit strategies?
• What confidence in the company capabilities?

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1. Assuming that the Premise is correct,
what do investors need?

• They need (or want) to know
• How much money what will it be used for?
• What will be the return on the investment?
• What are the exit strategies?
• What confidence in the company capabilities?
• Will the technology work as promised?

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Outline of this Presentation

• 1. If that business Premise is correct, what
  do investors need?
• 2. Do we know what we are talking about?
• What is Due Diligence?
• What is Technology Due Diligence?
• 5. The role of Technology Due Diligence
• 
  MORE

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Outline of this Presentation

• 6. Technology assessment specifics
• 7. Technology assessment practices
  
• procedures
• Who?
• A How-To for TA Contracting
• 10. The Other due diligence

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2. Do we know what we are talking about?
Beta-Rubicon, Inc. Virtual Incubation
Corporation The Alpha Fund
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Some Background on Beta-RubiconMissio
n We provide thorough, independent
technology assessments essential for sound
investment decision making where new or evolving
technologies are central matters.
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Some Background on Virtual Incubation
Corporation (VIC) VIC is a private sector
business incubator for start-up companies
developing innovative technology with significant
commercial potential.
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Some Background on The Alpha Fund The
Alpha Fund is a technology focused seed stage
investment fund seeking to capitalize on
strategic and dynamic new technological
applications.
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3. What is Due Diligence? The diligence
reasonably expected from, and ordinarily
exercised by, a person who seeks to satisfy a
legal requirement or to discharge a
responsibility.
Blacks Legal Dictionary
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The basic function of due diligence is to
assess the benefits and risks of a potential
investment by inquiring into all relevant aspects
of the past, present, and predictable future of
the business in which the investment might be
made.
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Doing due diligence requires the investor to
obtain information from the company by1.    
Examining financial statements2.     Assessing
management and operations3.     Reviewing legal
aspects including potential
liabilities4. (Document Transaction review)

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How extensive will due diligence be?        
It depends on the maturity, size, and nature of
the business.        It depends on the size and
nature of the investment and the sophistication
of the investor.  It should be reasonable
but as extensive as is practical (to protect both
parties).
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What laws require due diligence?
Statutory Law (State and Federal)Securities
Act of 1933 (Regulates disclosure in initial
sales of securities)Securities Act of 1934
(Regulates on-going disclosure) Each (1)
prohibits fraud (2) makes many people
potentially liable
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What laws require due diligence? Case
Law ---- Courts examine how various parties use
due diligence as a defense against certain
securities laws fraud-based claims (especially
section 11 of the 33 Act) --- The need for
technology due diligence has not yet been fully
developed.
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What Documents may be required to support Due
Diligence?1. Corporate Records2.
References3. Financial Statements4.
Accounting Practices and Policies5. Products
or Services 6. Market Data / Market Share7.
Revenue / Customers / Accounts8. Competitors /
Competitive Analysis9. Property, Plant,
Equipment, Inventory10. Contracts, Commitments,
Warranties
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What Documents may be required to support Due
Diligence? 12. Officers, Employees and
Organization13. Intellectual Property14.
Litigation15. Insurance16. Regulatory Issues /
Compliance17. Financing Agreements18. Taxes19.
Bank Accounts20. Reports and published
materials.
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Looking aheadTechnology is increasingly a
primary driver for new enterprise development.
How is this likely to impact on the due
diligence process?
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Stereotyping the parties
Risk-adverse Adventuresome
Business-savvy vs.
Tech-savvy Skeptical
Optimistic Investment
Inventor/ Side
Entrepreneur
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Technology Assessment ?

• Addresses the investors question
• Will the technology work as promised?

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Technology Assessment ?

• Addresses the investors question
• Will the technology work (and be delivered) as
  promised (with the resources described and in the
  time frame planned) (and will it make money)?

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4. What is Technology Due Diligence?
A. Defining Technology and
Technology- Based Enterprises
B. Conventional Due Diligence C. A Paradigm
Shift is Underway D. Where Technology Due
Diligence Must be Employed.
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5. The Role of Technology Due Diligence

• A. Protecting the Inventors the Investors
  
• The perspective of technology proponents
• The role of investment professionals

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6. Technology Assessment Specifics

• Feasibility as demonstrated in planning
• Capability (organizational)
• Intellectual Property (IP) trend analysis
• Confidence builders
• Success factors

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FEASIBILITY1.    Feasibility of Proponents
Technical Plan2.    Feasibility of Proponents
Development Plan CAPABILITY3.    Proponents
Technical Capabilities 4.    Proponents RD
Management Capabilities 5.    Infrastructure
I.P. AND TRENDS6.    Security of
Intellectual Property7.    State of the Art
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Technology Assessment Specifics

(continued)CONFIDENCE8.    Identification of
Risk Factors9.  Strengths / Weaknesses10. 
Overall Credibility SUCCESS FACTORS 11. 
Likelihood of Achieving Technical Success12. 
Contributors to the Likelihood of Achieving
Economic Success
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7. T. A. Practices and Procedures(A very brief
overview)

• Response to inquiry
• Selection of assessment team
• Contract discussion / scope definition
• Costing
• Contract
• Assessment (staged, milestones, interim reports)
• Reporting

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Technology Assessment Report Contents
(typical)Executive
Summary1.    The Proposal / Proposition2.    Fe
asibility Issues3.    Capability
Issues4.    Proponents Infrastructure for
Supporting Proposed Work5.    Security of
Intellectual Property6.    State of the Art in
Proposed Competing Technologies
7.    Identification of Risk Factors8. 
Overall Credibility of Proposal / Proposition /
and Proponent
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Technology Assessment Report Contents
(typical,
continued) 9.  Likelihood of Achieving
Technical Success10.  Commercial Potential11.
Likelihood of Achieving Economic Success11. 
Recommendations / Conclusions / Warnings12. 
References SourcesAttachments Copies of
Pertinent Agreements Credentials of
Proponents Methodology Used Background
Materials
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8.
Who? Independent / Objective

(apolitical not a

consultant-salesman) Expert Knowledgeable

(technology business)

Specialized Service
(not a
side-line or part-time)
Credible

(demonstrated competence)
Responsive
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9. A How-To for Technology Assessment
Contracting

• Non-Confidential technology disclosure
  preliminary Scope-of-Work
• Assemble Team Allocate and dedicate resources
• Contract Discussion, finalize Scope-of-Work
• Determine Fees, execute contract
• Begin TA milestones and Go / No-Go decisions
• Reports Follow-up

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• 10. The Other Due Diligence
• Early stage companies should do their own
  careful due diligence on their potential
  investors.

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• The Other Due Diligence
•   Financial Terms and Conditions
•   Founder / owner equity dilution issues of
• control
•    Will the investment be Value Added
• money?
•    What is the investors track record?
•    Fit, matters of style, compatibility

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RECAP The basic function of due diligence is to
assess the benefits and risks of a potential
investment by inquiring into all relevant aspects
of the past, present, and predictable future of
the business in which the investment might be
made.
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REVISE Comprehensive due diligence should
assess the benefits and risks of a potential
investment to all parties by inquiring into all
relevant aspects of the past, present, and
predictable future of the business and business
relationships resulting from an investment.
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CONSIDER What you would consider to be the
most critical set of questions you would want to
have answered if you were considering making an
investment in an early stage technology-centered
company?
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• Contact
• Dr. R.R. (Ron) Goforth, President
• Beta-Rubicon, Inc.
• 21 W. Mountain St., Suite 123
• Fayetteville, AR 72701-6064
• Tele 501.444.8118
• Fax [phone]
• Email rrgo4th_at_beta-rubicon.com
• Web site http//www.beta-rubicon.com