VC 101 - Tech Due Diligence led by Arden Tse, Yaletown Partners

0:03 foreign Tech due diligence session organized by The Venture Capital Association of Alberta and my name is Omi Velasco I'm a principal of graphic adventures and executive director of the vcaa uh we're going to start on time as we did last time uh so um Arden thank you very much for for delivering this session today I'm going to transfer uh the host to you right now okay

0:40 there you go all right let me just share my screen so we can get everything up here and I should also mention that uh we have Evan and National from the U of A uh vcpe student Club who are helping us organize this speaker series so I want

1:12 to thank them again and they're going to be coordinating the Q a today as well awesome all right well I mean we might as well uh get things going looks like the participants are starting to kind of Pile in and um you know just for everybody's benefit um yeah maybe I should talk a little who you're talking who's who's presenting this you know uh yeah so uh my name is Arden Shea I am a investment manager with Yale Town

1:42 Partners uh Venture Capital firm here in Canada based in Vancouver as the name implies and Yale Town's been around for about 20 years so you know the company's been in the Venture Capital game for a while I myself have been an adventure for about four years now but spent most of that time in the last two decades or so in capital markets um uh you could say I'm a finance and investment guy from commercial real estate to public equities I've

2:07 represented pretty much spent my career representing uh investors from private individuals all the way to government essentially taxpayers as well as Pension funds and uh at the institutional level and so uh for those of you who saw uh you know Pat lore's talk last week um I was there and I think the really interesting thing about venture capital is that it's one of the few Financial professions where there's so many different places we all come from you know it's not like you go

2:38 get your CFA you do your Finance degree and then you go work in a shop investing venture has such a wide range and diversity of people I think that's what makes it really interesting so you get guys like Pat who uh were very successful entrepreneurs and have an incredibly uh intimate knowledge of operations you get people like myself who come from a capital Market it's an investment background you want to look at things from more of a macro level

3:02 sometimes and so I think there's something to learn from everybody and um the important thing is that you you know as the audience I'm assuming everybody here is learning to be an investor uh kind of develop your own perspective of the world your own View and your own way of looking at investment um there's never I think we always used to say in one of the places I worked investing is like religion everybody has their own version or take of it

3:27 um you're right it can make money so with that uh that's kind of where I'm coming from in talking about due diligence today you know Pat we have a very high level overview of the industry itself and what I'm aiming to do is take you down the next part of the funnel and talk about okay what do you do once you've decided to make an investment so due diligence I mean the definition is up there for you

3:51 to see um there's some slides here why do you want to do it well I think there's some very salience uh news out there and it has been for a number of years about what happens when you don't do your due diligence properly uh as recently as you know in the last few months what happened with FTX um what happened with theranos a couple years ago um if you are a professional investor and you were in the representing someone

4:21 else's money you have a fiduciary duty to make sure you were taking care of that right you have to make sure that uh you are doing the your homework and not to say that due diligence is a guarantee of anything but you have to actually show that you did some research and you have some idea of the risks that were involved and why you got and all the reasons for investing in the first place so let's get started

4:46 and the first part of uh any due diligence process essentially doing your homework is information gathering well I mean how how does everyone how do you get there um obviously the first thing is companies come across radar in many ways uh it's not like in public equities where you're looking at companies that are already listed on the stock market or for example in uh real estate where you're looking at listings or properties that are out there existing

5:14 private companies startups essentially at the early stage remember we're focused on early stage here they can uh come to you uh you can find them at pitch competitions it might just be through someone you know but there's so many different ways that an entrepreneur can come across your way and your job is to evaluate them and figure out whether or not you want to move forward and you essentially start with what we call an investment thesis and you know

5:42 without getting too detailed into it really remember I said earlier as an investor your job is to have a perspective of the world where do you find Value what do you see as important and so uh it's like a theme right for a fund so for example with accelerate fund which I manage on behalf of the Old Town Partners we look for early stage companies that have some beginning Revenue typically in software and uh who haven't not raised a series a yet you

6:11 know so those are some of the so there's some initial qualifying uh requirements that we we put in there and it kind of helps you narrow down the universe because you can't go down you can't even as a journalist investor you can't chase down everything right you cannot go out there and invest in every possible company out there you need to have a framework and a lens to start with the very least so establishing those basic criteria are

6:35 important and that's how you kind of start filtering all those you know I mean because some funds um you know we'll see 10 15 20 pitches a week uh I mean Pat I think he noted a number uh but we see a lot of uh of companies especially the further out you go like accelerate funnel only invests in Alberta based companies and we still see a good number but once you start expanding that scope let's say you're

6:59 able to go across Canada North America you have to have a way of filtering it out and there is a process right generally it funds I mean if you're an individual investor you can do whatever you like you can invest based on the fact that you like where this founder came from you went to the same school you worked in that sector or you'd simply you know like the cut of their jib so to speak but in a fund there's actually a process

7:27 where again when I talk about that funnel earlier you start with the company you run it through a bunch of filters um and then you kind of take it through a formal process before you come into a final decision so uh for example accelerate fund what we'll do is we'll look at the applicant so we'll look at someone out there and say does this is there an opportunity here do we think it's going to fit is the size of the

7:51 round they're raising um you know suitable for our our investment uh thesis and then if it is if our team decides okay you know or one of us decides yeah yeah it's worth a discussion we might call up or talk to the entrepreneur take a meeting and have an initial discussion now for some investors that's a pitch we know we'll actually uh ask them to to pitch us I think um for us our we typically like to just

8:15 have a conversation you know 30 minutes get an introduction be an entrepreneur and just get to know them you know it's important to us to understand where the entrepreneur came from what motivated them what their background is and if we feel that the basics are there then we'll likely have them then do a full pitch and we'll schedule an hour to the entire team and so the team then makes a decision on whether or not we go forward

8:36 with due diligence and then we get through that uh due diligence process which typically I would say on average takes about 30 days up 30 days and then we bring it before an investment Community which ensures that other people who are not involved in the day-to-day get to see what we're doing and we have to make a business case for them so we're actually as investors repitching and selling the idea of that startup so if I don't feel

9:05 that I can sell you to my investment Community right as an investor chances are I'm not going to want to take this through due diligence so I have to be confident as an investor that I can um actually put this through and get approved and the way you do that is your due diligence so first things first a data room right as an investor you want to ask the entrepreneur for access to the data room and it can look

9:35 um it's as simple as something like a Google Drive Dropbox it doesn't have to be anything fancy but the idea is to have everything organized in one place so that it avoids having multiple back and forths with lots of emails saves you time you know because you can uh as an entrepreneur if you have a team so you're not having to email stuff back and forth to each other and for the entrepreneur you know they might have

10:00 they can have one data room that they can share with multiple investors again instead of constantly emailing stuff back and forth and having to ask for stuff it's important to make this a time efficient process because a lot of the times yeah I mean entrepreneurs it's respecting their time they're incredibly busy people building their companies and the last thing you want to do is be peppering them with emails and questions uh every 10 15 minutes for the next 30

10:23 days so the idea is hopefully yeah and I've seen you know that I don't see a lot of companies that um are raising money that don't have a data room and I think you know maybe I'll credit that to the fact that the uh the ecosystem has matured and there's more entrepreneurs and there's more training and there's more talk and education out there about how to prepare for uh for investment so we don't see as many companies now that don't have a

10:48 data room or haven't assembled yet one yet by the time they talk to investors and so what I'm providing here and we'll use this and come back to this uh throughout the presentation but this is the actual checklist that we use at Yale town at uh for accelerate fund and not everything will necessarily be applicable and this presentation will be available later on uh via link but the point is this helps us keep organized and what we'll do is we'll send this

11:17 checklist to the entrepreneur and say this is the information we're looking for we'll figure out what's applicable and what's not um and that way we know we've covered everything and been thorough about it again you know it's a it's a process all right so you've got all the information right what do you what do you do with it and there's a couple of couple of I would say in my experience uh primary things one you're looking to

11:42 verify the information given to you by the company so the entrepreneur is pitching you the entrepreneur is telling you something about the market they're telling you something about their company uh they're telling you something about a technology and you don't just take what's in the pitch deck and then regurgitate to your investment committee I mean you use parts of it sure that's fine but what's important is you actually go back and verify that in the market so for example

12:06 if an entrepreneur says we think this Market size is X right our total adjustable marketer we think this is how big it is or we're going after there are sources you can go after as an analyst or as an investment professional to verify that make sure you're in the same kind of order of magnitude I mean recently we're doing due diligence on a company as a medical device company and they gave us their calculations because it's

12:30 kind of a new blue ocean territory where uh it's not really known uh how big the market is but they gave us their calculations based on certain information uh that they gathered kind of using an adjacent Market they came out to a number it was like 12 billion for their total addressable Market uh for this one business line and we independently went and looked for similar information and ran our own calculations from the bottom up and we

12:57 came up with a number that was around 10 billion so we know that the order of magnitude is close and that's really all it is it's not meant to be an exact science but you're looking to verify what they gave you would not just take it for granted or take their word for it and then you have to put this uh together a narrative right a business case that supports uh your conviction now the thing about this is this is it's

13:18 a bit of Art and it's a bit of science it's a bit of understanding okay what kind of business are we looking at what are the indicators of success remember what I talked about earlier on about developing your own perspective of the world part of that is figuring out where you're going to specialize and so you understand what the drivers of value are so what I mean is if you are investing in a software as a service company right

13:40 uh it doesn't matter what industry generally there are certain things you're going to be interested in if they're in Revenue uh you're going to be looking for growth rate you're going to be looking for margins you're going to be looking for uh certain metrics that give you an indication because we've seen so many companies in the past and we have an idea of what kind of metrics uh matter and at what stage if you are in you know looking to invest in a life

14:07 sciences company there's not going to be a lot of Revenue at all there's going to be a heavy r d component where they're raising a lot of money and it's going to be likely a very binary outcome either this thing is going to hit it and everybody's going to get rich or it's going to go nowhere so you'll have to look at and understand what Milestones are we looking at what is the company done to de-risk those Milestones so

14:27 again it comes down to understanding what's the story that you need to tell and the business case that you need to create that supports that decision to say yes we think the risk is worth investing so over time like I mentioned you know everybody has their own process right and and how you put together another information how uh you know Pat and the Isaac Panache or the people at uh graphite or Yale Town how we organize

14:52 our and do web due diligence even between you know partners and people within the same firm will vary because everybody kind of learns and assembles information and puts together business cases in their own way so an example of a process might be you know like for me I like to take all the information and take some notes and read I don't start writing a memo or anything just yet what I essentially do is I'm trying to

15:19 understand all the data points so that I can start seeing patterns and coming up with narrative inside my head I'll pull third party information like market reports and and uh look at any sort of customer calls they may have or industry articles and you know use that to start triangulating on okay I see where this is going I see what kind of story I can tell and how I can back it up with some data and some

15:43 information whether that data is qualitative for example and that might just be this company's pre-revenue but they've got um about a dozen customers I've given some really great feedback and you can use that to back up the proposition once I've spent some time connecting the dots and understanding what the story needs to be um then that's when at that point I will actually start sketching and outlining a story right and writing it out this is no different I said it's exactly like

16:13 building a business case in school uh for those of you who have done it um but you really you're you know you that's what you're putting together here in order to pitch to your investment committee and of course the final part is putting pen to paper and putting the investment members together and if we have time I actually have a mocked investment committee memo uh presentation um that I will run through with everybody once we're done the

16:36 presentation just so you can see where all that information goes and how it gets uh presented for us anyhow again not every company and every firm does it the same way what I'm hoping to show you is just one way that we do it and to give you some idea of how to get started uh what we're going to go into quickly here are just some high-level ways to organize your thoughts right I mean um it's again I can't stress enough being

17:00 organized is really important in doing your due diligence because what you're trying to do is build a case uh the first thing we'll cover I mean the major area um there's three major areas and some other smaller minor ones uh so the first the three big ones you'll hear often that investors think about especially in early stage are team technology and Market and different investors again we're all people we have different perspectives and backgrounds uh we will come up we

17:27 will value each differently some will put a heavier emphasis on Tech some people place a heavy emphasis on the market and some especially early stage say team is everything because the business and the tech may change down the road it's a great team that'll be able to navigate through so again you as an investor have to figure out for yourself what do you think makes the most difference and what's important to you for the stage and type of company

17:50 you're investing in so what's behind the solution right it's important to understand the technology um and how it creates an edge for the company because what are we looking to do here let's not forget at the end of the day this is not philanthropy we as investors the first question you should be asking yourself how do I make a return on this investment and part of that is understanding what the asset's edge is and doesn't matter what asset

18:15 class you're investing in what you're trying to do is figure out where does this company have an advantage over others how does this asset stand a chance of generating a higher return or at least succeeding anyhow in in especially for Venture in growing and generating the kind of return that we need and part of that is if if you're an adventure you're likely uh investing in technology so Is it artificial intelligence is it a medical device is

18:41 it some sort of new therapy um you really it's important to have a at least a high level understanding of the technology what it does how it operates and the advantage it confers upon the entrepreneur now intellectual property is something that everybody Associates with technology and it is important but it's not always important right I mean what is IP I mean really these are you know it's the uh all the documentation evidence right that uh this first where

19:14 it says all the employees and Founders agree the IP belongs to the company if that is really uh an assignment agreement so for example um you'll have for example a team that's done a lot of research at a university and they have decided that you know they want to create a company out of it uh that's where they will agree that you know they'll write an assignment basically saying okay the stuff that we developed here at the University now

19:37 belongs to the company right so it's important because that's an asset and that could be worth something you don't want someone to be able to walk away with that and then the company doesn't have a right to use that intellectual property anymore uh and you know it could be patents copyrights trademarks and such what's more important though uh generally is the strategy okay intellectual property and Technology already in and of itself doesn't have any value okay it's how you

20:03 apply that intellectual property that has value so and there are actually firms especially if you have deep Tech that will work with you can work with um that will work with the entrepreneur in order to come up with an intellectual property strategy so it could be something like we're going to register this in Europe we're not going to develop there right now but what this does is it prevents certain companies there where this industry is starting to

20:26 grow from developing this stuff ahead of us so we get a chance to develop both the North American Market first right that might be an example of a strategy so it's important to understand if they have that going on what that strategy is and how that plays into the growth of their company so like I said IP isn't always necessary but when it or applicable but what it is you know there are reasons why it's important to us as

20:52 I said you don't want someone to be able to walk away with the secret sauce uh at the edge that the company might have because it could you know lead to things like as noted here loss of income the valuation of the asset uh it's important to make sure that that's all you know set and tight again sometimes it's just trade sequence and sometimes it's just it's a speed to Market play but your job as an investor is to understand that and

21:16 then be able to characterize the risk involved so again I said we come back to this example checklist um this is I'll show you kind of like this is where we covered this right and so it's a very pragmatic application of our of a checklist so under technology and product you know we try to look for things like uh customer use cases we'll talk to customers themselves we'll actually do a call uh what's the competitive positioning what the roadmap

21:43 is like these are all things that we're going to want to examine um we might want to look at okay what patents have been filed right what um are there any disputes are there any lawsuits um that sort of thing all right on to team right I mean uh I think uh everybody knows like the important thing is we're investing in people when it comes to venture and quite frankly um any sort of Adventure uh I think one

22:10 thing I've learned over time and I've heard from other far more experienced investors than I have I am um is that Finance is people at the end of the day you know you can do all the performers and all the all the business uh analysis you want uh and you can be a spreadsheet wizard but if you can't take that information and turn it into a story a narrative that motivates someone to do something with it then

22:37 um it's really all for naught and it's the same thing with the Venture you know there's a there's a it's important to have a team uh that can take that you know that uh invention and turn it into a business I mean this is really where understanding the difference between Innovation and Entrepreneurship is important right because Innovation is the creation of something new and that's something that you know people do every day in its labs in uh school and we're

23:06 just you know sitting under retreat but entrepreneurship is turning that Innovation into a business and that has to be done by people and so it's important to understand the team behind the Venture you're looking to invest in so I thought I'd outline a few things and quickly go over something maybe important and and how you can find out right things we think we think about are you know Solo versus co-founders solo Founders uh have a hard time you know

23:33 often because they don't have someone else to bounce stuff off of and that's okay if they have a good team around them that can complement uh their strengths co-founders uh if it's a team we're always interested in how they meet what have they done together you know are they battle tested there's a difference between two co-founders who have worked together for a long time and two who just met at some startup Camp um have they been through ups and downs

23:57 because everything's great when there's no money on the table and everything's going well everybody's full of idealism and optimism but quite frankly you know when things go south that's when you find out if you've got a good partner or not uh are they have do you have an experience as an entrepreneur have they had an exit what kind of exit was it um what lessons did they learn those are always important because there is a certain degree of pattern matching that

24:23 um and understanding how difficult it will be in growing an exiting a company and so somebody who's had that experience certainly that that counts uh do they have industry or technical experience I've always said I will rarely ever I will never invest in a team of mbas that have no technical or industry background uh because you can find lots of mbas to surround the technical founders with coming back to what the edge is it's somebody this is typically how an

24:49 entrepreneur has an edge is they have such a deep appreciation understanding of an industry or a technology because they've worked on it they did a PhD on it or they spent 10 15 20 years in an industry they know the problems inside out they know how to talk to the customers in the industry or they have some sort of I guess what you'd call um asymmetrical knowledge of what's going on in their company that others don't

25:15 um business experience is important again I mentioned right the difference between Innovation and Entrepreneurship um but the thing is we can if they don't have a lot that's okay are they coachable enough to be able to say hey if we help you um if we help them and bring in business people because part of our job as investors as Venture Capital investors is having a network right that's one of the greatest values most natural investors bring because

25:41 we're out that's part of our job in fact um I often uh joke that my my my part-time job is as a recruiter because what we do is we put people together with companies where there is that business need um again I mentioned coachability you know there's some other factors involved here what do they have they need to obviously have Vision I think Pat mentioned last week that resilience was the number that one thing he looks for

26:05 you know does the that they have founder magic whatever that magic is um you have to figure out what that means for you uh because it again I said before it it's everyone's different and what someone what another investor thinks is Magic uh I might look at that as a Achilles heel and also uh alignments and incentives and I'll go into this a little bit more later in the cap table and compensation discussion but you know our basically

26:34 the question is are they motivated and incentivized to grow this company in the direction and the kind of way that we need as an investor is there a match there um a famous public Equity investor Charlie Munger who is Warren Buffett's partner has always said show me the incentives and I'll show you the outcome and that is always a truism because again it comes down to people uh and I'll explain more about that we'll go further into that uh in the next few

27:05 slides um and current future needs of the company right like um you have certain skills now so for example you've got a medical technology company and it's full of really bright technical people and people who uh have just incredible scientific credentials and that's what's needed right now because we have to get through clinical trials and to be able to validate and get a regulatory approval for this device for example but the next step after that is to commercialize and

27:35 you're going to need people to understand how to do sales they understand how you need to understand how to do business development there's no use having them on the team right now but knowing that once we get these approvals we're going to need those people it's making sure that the entrepreneur understands that and there's a plan in place and so what have they done is it you know maybe they have at least an advisor or a board director

27:55 that has some experience in the area or some networks but it's important to think about current and future needs and that the entrepreneur is thinking about and understands that and a few different ways that you can find out right I mean talk to them right this is a big part of you know this isn't you know a case where we just hear a pitch and we go off and then we you know uh do some research and go yes we

28:16 want to invest um in fact sometimes it's better if the uh due diligence process takes longer or there's bumps along the road I've had a couple of uh deals where that was the case and it really gives you some insight into how the entrepreneur operates under pressure it gives you some insight into how they communicate and how they deal with adversity uh is if you're going for example you're trying to get through getting a deal done and suddenly you find something in

28:43 the sharehold agreement that does not work and is a is a is a deal killer and you have to negotiate around that and then they have to deal with their board there's all kinds of Dynamics at play here how well does the entrepreneur handle that you know do they find a way to push forward or do they huff and puff and throw their hands in the air and say this is a waste of time it's a really

29:03 good test so spend time with the entrepreneur and talk to them and you uh get to you know characterize their behavior um and there's you know there's the there's that uh always the story of how you know are you you can read this in a number of interviews where CEOs or people who are hiring like to take out the candidate for lunch and see how they treat the serving staff because that is an indicator of how the truth people

29:27 right so don't be afraid to talk to the entrepreneur see them under different circumstances sit in on a meeting whatever you need to evaluate their behavior you can do reference calls that's always a good one we'd always do reference calls look at the org charts to see if they understand the parent and future needs of the company um talk to their board and their advisors and check out what the makeup of the board and advisors are you know

29:49 are they just all investors from before and none of them have any real experience in the area or has the entrepreneur really cultivated a board where he's got world-class people from that industry that can help them grow look at the cap table how much does each you know each founder own so for example if you've got we had one case where we looked at an uh you know a company that was looking interesting we wanted to invest in them

30:16 and once we looked at the cap table we saw that you know it was two Founders essentially one founder had pretty much 90 ownership of the shares and the other one had five and the rest were in options but the one that had five percent was the CEO was doing all of the main in day-to-day operations had put in more money into the company and then the other founder and every time we tried to get at the

30:40 heart of it the main founder who owned a bigger chunk of the company never really would give us a straight answer because when we said we'd like to make sure that every you know the CEO is uh has an appropriate level of of ownership in the company so that they're incentivized to take this thing all the way and to not feel um any sort of of uh resentment over the workload um the answers we kept getting was we

31:06 want everybody to be you know we want um everyone to be well compensated and and we just couldn't get a straight answer and in the end we just didn't feel that that was the right kind of alignment and it wouldn't be fair and you know it's um it was in a situation that we were comfortable with so we passed right but the cap table was what really Illustrated to us and we wouldn't have known until we looked into how much

31:28 ownership they had compensation is important are they paying themselves at low or above market and you know as an investor you have to decide for yourself what do you think is reasonable there's Market um data out there right and comparables you can look at but I've worked with other investors who felt like you know they shouldn't pay themselves anything more than forty thousand dollars a year they need to be hungry and scraping by um others who have a belief that no you

31:56 need to be able to make sure that your bills are paid and you're not stressed out so that you can focus on the business and not uh feeding yourselves and we've seen cases where entrepreneurs are have I've been paying themselves way above market and it's a huge drain on cash so it's important to understand the compensation and and they should be showing you their compensation um tables and so again in our checklist we'll look for org charts you know we'll do a

32:24 review of the management and directors and advisors look at the comp uh any sort of uh stock option agreements payroll um anything you do uh with the compensation structure uh now on to Market uh this is a quote from um a prolific and influential investor uh the late Dawn Valentine founder of Sequoia Capital One of the if you call you know I guess you'd call OG Venture Capital firms out of the valley uh one of the original investors in Atari as

32:56 well as Apple um and Don really believed his big emphasis was I don't care about the team uh you can always replace people uh I'm paraphrasing here but his emphasis was you know you have to have a big Market if you're going to build a massive company you've got to go after a massive Market and um that's you know that was his philosophy right and again everyone's different but um it certainly makes sense and what it comes down to when you're

33:25 doing a market analysis I mean it's business 101 right there's some important things to understand um the market size this is the big one like we just talked about Market size right is it big enough and I won't go into the Venture style growth because Pat went into that last week and the point is not every company is even intact is suitable for Venture Capital right not every company um is going to grow at that uh it is

33:53 going to show that kind of growth rate the super linear growth rate and not every company should so here's a note though it's interesting is it's not always possible to determine uh especially at the early stage right how big the market actually is especially um if it's what we call a blue ocean concept where it's brand new it's novel it's not an area that's been tackled before and so one of my favorite examples of this was Uber right and

34:16 um several years ago uh so back when I was with public equities um there's a uh NYU Prof named aswath demudarin and he's really famous amongst public Equity investors and he basically came out and gave Uber evaluation and said that you know I think the market total the total Market is really the taxi Market it's about 100 billion right and so he was very bearish on on Uber's growth but this is how he proxied the market

34:44 well Bill Gurley uh who uh at Benchmark Capital was a series a investor uh so this is back in 2014 or so uh he put out uh this you know really interesting analysis of how he thought uh deminarian totally missed the mark because he didn't take into account a bunch of stuff like price elasticity different uses so it's not just taxis um it's you know use in less urban areas where taxis don't make sense it's the

35:11 rental car market it's short trips it's transporting kids or alternatives for seniors it's mass transit supplement so for example if you miss the train uh because of the convenience and and uh price of uber you would take that instead um and also another big one is an alternative to car ownership and so you know that was how uh bill was looking at the market and he sized it much much higher and the interesting thing is looking we have the benefit of time now

35:39 and looking back and with you know what Professor Dan said was you know he figured 100 billion million dollar market and that you know the best Uber would do is like a 10 penetration rate right so that predicts what a 10 billion dollar kind of Maximum revenue for for Uber well when you look at last year Uber's uh Revenue was about 30 billion and it really did um substitute for a lot of the things that Bill had said so it's interesting to you

36:07 know while Market sizing is especially in early stage Venture it is uh is important also understand that there are it could be especially for really disruptive technology adjacent spaces where and different uses that you haven't accounted for um thinking what the trend is happening in the world right uh the Aging population certainly makes a lot of life science and medical Technologies important it could be digitization it could be the hybrid Work World now like

36:37 what is the major Trend going on that this company is going to be riding on that creates an opportunity for them right want to look at the competitive environment right um and there's no such thing as no competition if you ask an entrepreneur what's the competition and they say nobody uh then they really haven't thought about it because status quo and doing nothing right is absolutely not alternative one of the questions we ask customers uh when we

37:02 talk to them and in our customer interviews is you know what made you decide to move on from the status quo what got you to do something different and adopt this solution so that is important to understand um I'll take a quick second here to talk about my pet peeve of the um you know the classic competition slide where it's uh it's a grid and then the entrepreneur is somehow in the top right all the time and the first

37:29 question I ask myself is did you just make up those two factors so that you wind up on the top right hand side how do you know that those things are important to your customer so if you can come to me and say we've spoke to a hundred different clients and they said these are the things that are important to them and where we send out amongst others now I can believe that it's a competitive Advantage all right you know and then

37:51 you need to understand who the Target customer is right and how the how is the company going to reach them um a spotlight on a material you know I mean A business plan is important because you know you'll see a pitch and not all companies have them but what you're looking for if they have it is a much more deeper dive and detailed uh look into the the business itself right that certainly helps so make sure to ask

38:14 for it so again from our checklist here's a bunch of things that we'll look for and ask for in order to ascertain uh the market uh tying up for some really quickly some stuff at the back on the back end here uh I always say with legal uh with legal trust is good paper is best is the company for real so you're going to want to be verifying that they are and you do that through the minute

38:36 book generally where we have our legal counsel come in and do the legal due diligence portion of it and you know what they're looking for are things like a certificate of incorporation bylaws it's just basically everything this company is who they say they are and they're doing things appropriately by the book so to speak and um a shareholder agreement is an important one because the shareholder agreement really governs how you get in and get out of a company as an owner and that

39:01 could impact you as an investor so a lot of things to understand there financials there definitely are important they tell a story right especially historical uh what it does is you can kind of get a sense of you know the quality of earnings seasonality does he understand entrepreneur understand um have a good sense of of their expenses and their revenues um what have they spent it on and looking forward in their projections it is a simple forecast but

39:31 it gives you a sense of are they realistic about where the company is going right and and how big the market potential might be and again you know you don't need five eight ten years out in the future um because we the further anything passes year one is really a guess but it really is an insight into how well the entrepreneur understands their business and how and how realistic they think are they uh it's going to be or you think it

39:57 will be so for example if they tell you well in year two we're going to be expanding uh with offices internationally and then you look in their budget and they've got three thousand dollars budgeted for travel there might be a bit of a disconnect there right um I talk about what I like to do is look at the year one Revenue plan and what that really means is you know year one like from when you invest in the

40:18 next year you can actually break down the sales right if you understand for example the math of how many customers you need to call uh at times you know um how many how much revenue each customer is worth you can kind of start getting building a sense of okay this is realistic you know if you've got a top but if you have to talk to a thousand customers next year and you're the only one as the founder doing the sales that

40:40 might be questionable so it's a bit of a reality check um and again this is just a good litmus test to see if the the range of possibilities right um it's not meant to be precise you're not going to hold them to it necessarily but you really do want to get a sense of what's the what's the order of magnitude this company can go to uh the cap table again this is where you uh get to see how the uh what the makeup

41:07 of ownership is right and it's important because um it really represents all of the activities involved in the ownership of the company and you as an investor need this in order to model future current and future rounds of financing right uh you will do an exit analysis where you look at okay if we buy in for this much we get this percentage of the company what does that mean for us at a time when it exits how

41:31 much do we think we can make right because remember you have to really understand how am I going to make a return and what does that return look like and the nice thing is when you have a tool like this you can use it to model things like the entrepreneur says well I want you know I'd like a higher valuation um or it might be uh we want to raise more money what does that mean you know

41:50 how does that dilute our position um as an interesting story one of our portfolio companies and accelerate fund 2 I use this tool where the entrepreneur was thinking about asking for they wanted like another million dollars in their valuation and in the end I was helping I modeled it for him and showed them that the dilution actually didn't really matter that much uh you know wouldn't make a difference but it would make a difference for the investors and

42:14 so they were able to come to we were able to come to a reasonable agreement on what the valuation would be so this is probably the most complex math and important math you'll do as an early stage investor right and so again all the things I talked about here there are implications right um You might want to understand for example if there's prior investors uh what kind of shares do they have if they're prep shares and you're now

42:37 buying common shares in the case of a a sale um or some sort of bankruptcy event your Capital sits behind in priority to the others so it's understanding your liquidity ranking dilution is there debt in place that takes priority over you who are the other investors you know are they as the investors in this round are they able to bring in more money next round uh if the company suddenly needs a like let's just say a pandemic hits and

43:04 the company needs to bolster their uh their cash reserves are the investors around the table able to Pony up or are you the only Fund in there that has you know that's going to have to take on all the risk um and again I'm making sure the interests are aligned as the story I mentioned earlier before you know if we see that a Founder doesn't have enough uh ownership we do question if they're going to be motivated to take it all the

43:28 way to the end uh pricing on every stage round let's just briefly touch on this you know there's not um there's not a lot of magic to it and it's not it's not an exact science but it really doesn't have anything to do with the value of the company especially if they're earning Revenue under a million dollars right it comes down to supply and demand how much the entrepreneur needs and it wants a sell of the company and how much the investor

43:51 needs uh for their investment in terms of ownership um and there are tools that investors can use uh to mitigate that for example um ratchets which is an anti-dilution clause which basically protects you from uh losing money right in the next round like says you raise if you buy into the company now at 10 million dollars what you're trying to do hopefully as a venture investor is increase hopefully the next raise because that's how we validate the price of a company other

44:19 than an exit uh it's going to be at least 20 to 30 million dollars in value but if the company doesn't perform and let's say they have to raise at a much lower even you know uh Down Round right we'll call that which is less than 10 million then there can be mechanisms in place that instantly give the investor more shares to protect their percentage ownership position right and so that when the exit eventually comes you still

44:43 get the percentage you need um and really as you know the valuation of this round is is influenced by what you think the valuation the next round will be so remember when I said okay you know I'm looking at the next round if if I'm about investing now and you know the entrepreneur wants a five million evaluation I have to be convinced that by the time they get to the next race the company can be we're somewhere

45:11 between uh 10 to 15 million and that takes a bit of an exercise in understanding their sales and their projections what the uh how the market will evaluate this type of business model so if it's software as a service what do you think the multiples are going to be and that has a bit of an influence of a lot of influence quite frankly on how much we'll pay at this stage and um again yeah the terms uh all the

45:35 terms I just talked about they affect the riskiness of your investment um there's a number of factors beyond price and I think you know rather than get into it um Elizabeth Yin who's a early stage Venture investor and co-founder of hustle fund out of the valley she's got a great Twitter Thread about uh early stage valuation and when you get the copy of this presentation you can click on it highly recommend following her uh she tweets prolifically

46:00 and makes a lot of sense she's a very uh great uh great source to learn from for early stage investing okay and this I mean Craig is going to go into this this next week in terms of structuring um eventually deal but you know really it just comes down to what you know how are you getting into the company what kind of Rights you get what is the form of is it Equity is it some sort of

46:27 convertible debt which is a a loan that you're making that will eventually convert into shares uh they all have different kinds of risks associated with them a few odds and ends I mean really it comes out we have a list but anything you need to feel comfortable right uh with this the risk reward ratio you could you should ask for um and it might be a tour of the facility it might be talking to their staff it might be a demo of the tech

46:53 whatever it is you feel you need to put your case together as a professional investor we have a Duty right to look after the interests of our investors Capital limited partners there are clients and so you've got to maintain this balance between being conservative and being aggressive because if you're too conservative you could miss out on an opportunity and miss out on upside if you're too aggressive you might take on too much risk and wind up losing all the

47:17 capital and there's no right or wrong or easy answer to this that's your job as an investor as a fund to figure out where you sit on that Spectrum right and so you'll see in the presentation like I said these are the kind of things we ask for to ascertain all the information I just talked about so rounding it out putting it all together right um due diligence is really a fact-minding mission right that's either going to support or disqualify uh their

47:45 suitability for investment you're looking for Flags green flags red flags risks what's the possible reward how real is this would we see the potential and what do you have to back that up uh end result is usually you know you'll have an investment memo something on paper right a case that goes to an investment committee and ultimately you know investors are people right and so each fund or individual looks at things in their own way what remember I mentioned red flags

48:12 before and green flags well what one investor sees as a red or green flag another might not see the same way and so you have to understand that for yourself risk can often be a subjective thing um and not to say that anything goes there's General parameters out there but I don't want you to get the impression that there is a absolute you know uh kind of uh cut off for uh for everything a definition out there if there was uh

48:38 every investor would make the same Investments and generate the same return right and like I said it's important to learn from others but if you really want to be an investor get out there and I mean the only way to become good at this is to actually invest uh develop the mileage and develop your own view on what it means to find Value where value comes from and you know that might mean um putting some of your own money in as

49:05 an angel investor it might just be in following companies and their progress and coming up with your own thesis on them uh and seeing if you are right or wrong um if you look I mean they say public equities are you can easily build a practice portfolio and and you know monitor companies and see if you right or wrong that's a beautiful thing about investment either you make money or you don't there's no hiding behind it and

49:28 having an investment thesis and a framework and a discipline process it's not a guarantee of success but what it does is it gives you discipline and allows you to look back and say okay where did I go wrong what did I have to adjust how do I you know you can rationalize how you make decisions as a professional Venture investor if you're part of a fund a general partner and you're looking to raise money from limited partners you're not going to

49:50 convince them to invest with you by saying I'm really good at picking winners you need to show them that you have a discipline process and you understand that right and so I will um you know leave you with this quote never discount the role a timing and Luck play in success investing is a game of Risk versus reward and understanding the risk doesn't mean you get rid of them but it does mean you make informed decisions and you know I mean that being

50:13 said someone can make a lucky guess and make a lot of money those people are few and far between it is more of an art than a science there's no guarantees right as everyone interprets risks differently in early stage investing even later stage and there's a lot of external factors that can impact any asset class at any stage but well if you consider diligence as creating a foundation to capitalize on luck and increase your odds of success I think

50:40 that's a good way to look at it and you need to decide for yourselves what kind of investor or Capital manager do you want to be and that um wow that runs almost an hour but that is uh the presentation itself and what I will do is um I mean if anybody's interested in seeing uh quickly what an investment memo looks like I'd be happy to do that in overtime um if anybody wants to stick around but

51:05 um from there I'm happy to take questions I see there's a but here okay um all right let's start with the all the Q a there's only one so I'll start with that is there a ratchet from Founders side where Founders gets initial investment increase people we usually don't see that um that's kind of like the reverse anti-dilution cause I personally have never seen that uh not to say it couldn't exist but remember everything is a negotiation

51:34 right so uh you um if you can convince your investors as an entrepreneur to give you that I mean you look at Google and you look at Facebook you know these companies where the Power Balance was was with the entrepreneurs they were able to negotiate you know super voting rights and um have all kinds of stuff that most entrepreneurs couldn't um couldn't get and um just looking through the chat uh oh there we go thanks George uh that's the

52:06 uh that is the exactly the article great and okay these aren't questions but thank you George the Twitter thread um a Live question from Michael oh yes okay please um let's go to live questions if you type one in just put your hand up it'll be easier to actually just you know do a question and answer then to look through the comments okay Arden thanks for your time I appreciate it this evening um I just had a question about

52:34 um sort of relevance of the original business case when you're looking at an investment are you considering a requirement that a startup may have to Pivot or change some of the markets that it goes after or are you basically with due diligence you're just looking at is this is the proposed case going to work are you considering sort of backup options at that point well it's really hard to I mean if we could anticipate all the backup options

52:55 we see the future I think the thing is you are assessing the risk at this stage but one thing we do look at is optionality and it is that question of okay what other markets what else can this technology go and that plays a factor in whether or not we would invest because it is a case of well okay we think that this we have one company for example that we invested in a couple years ago that had about three or four

53:18 different product lines and they were focused on part line one first um but when but we knew that if they developed the other ones out they would get these would help manage to diversify the the risk and the revenues it was just a matter of timing the pandemic hit and suddenly the priorities changed but they found that another one of their products had far more traction than appeal because of the pandemic so they went after that so that play on

53:41 optionality really played out right so yeah you do want to look at the possibilities um but and you accept the fact that at this stage I think happen they could change right and it often does was that something that I had presented to you when they they made their original proposal as in you know this is our Focus but here are some other things or yeah oh yeah absolutely like that's why it's important to understand the pro

54:04 the suite of products on the roadmap uh because you as an investor have to make a call on okay if things went South what else could do with this now the entrepreneur might not be thinking that and that might be your value ad or you might actually get in a conversation and say what do you think of this if this happened you what you want to understand is how is the entrepreneur thinking about it right and if and if he can see

54:24 what you can see or she can see what you can see um that's certainly a positive thing so optionality is a way to manage risk that that balance between having a Founder who's dedicated and so like a True Believer basically and somebody who's more logical and maybe seeing those options I guess I I would agree with that you know I mean I think it comes down to what are they dogmatic about you know if they're dogmatical but okay there's a way to

54:49 solve a problem that's different than being dogmatic about solving a a certain problem a problem they're trying to solve right um so yeah I mean that's um that's a case-by-case call good thank you appreciate it thanks for the question mark uh anyone else [Music] with a hand it looks like we got a couple in the chat now we're going back and forth okay all right no worries no worries okay uh uh yeah I can absolutely if everybody

55:19 would like um okay quickly for Nile's question thoughts investing in first time Founders versus Founders and second denture onwards uh you know the fact is I think there's a lot of you know while I've mentioned that you know there are some points for having a second Venture it's not a guarantee you know and I don't think from for myself personally that's not entirely the whole Focus right uh it's not like um well I mean it depends if you found a

55:44 Google and you exited and you're starting something else but how many of those we come across um I think what matters is is what the vision and the market is I'm a big believer in the market right for me that's you know I talked about how uh we all have our our own views like I have to believe there's a big Market you're going after because then you have lots of room to play so if you're a first

56:04 time founder second time Foundry you know as long as your coachable and can learn along the way um it has some influence for myself personally but um there are other factors that I find are important but again other others either other investors I know even some I work with who if you were a you know a Serial entrepreneur right away that gets you you know in you're like doesn't matter if we're given the valuation we're in

56:26 right so uh and if you're interested I'd be happy to just run through really quickly the investment committee example I've got uh hang on a second here so you can see where and how all this information comes into play I'm just loading it up

56:57 and for those of you that do have to go thank you so much uh for attending um you know it is five six pm now after long working on a Thursday and I certainly appreciate uh your attention in coming here and I actually had to redo this presentation last weekend because I realized the presentation I had I normally use is geared towards entrepreneurs and uh I wanted to make sure that this came from the perspective of uh for an investor

57:25 okay so I'm gonna run through this and what I'll do is um I mean the the details aren't as important as just I'm just kind of getting a sense of the form of it uh because I do want to respect everybody's time here um so this is what an actual investment approval request looks like for our fund right um thank you James uh and so uh this is kind of a semi-fictional company and you know we have a an entire so my

57:54 our uh our investment memo uh I guess format really is uh influenced by my experience working in institutions I spent uh four years at aimco another year at a uh a wealth manager and like in in you know those areas of Finance is where it really cut my teeth uh in understanding how to put a bit together an investment in a business case not every firm or every fund will look like this some of them are just one or two

58:20 pagers some of them are even more detailed so this is just meant to be an example right so you can kind of crystallize how all this information comes down so we have an you know executive summary we'll go through um and this format is what we call docksides all right or slide yeah doc slides and so it's a combination of graphics and um text and what I'll do is I will send this to investment committee uh week

58:43 before investment committee so they can read it and then I have a shortened version of this that will go through a presentation of the highlights and spend more of the presentation answering questions and talking to uh committee about that so we don't actually read through all this with the with the investment committee you know so you'll see there's a company history we you know come up with our positioning what we think and here's our thesis on why we

59:06 want to invest so all the high level details then we jump into the opportunity right and you know there's a study of the market talk about the problem and solution a quote from an industry publication again what evidence do we have that kind of backs up uh what the entrepreneur was saying uh we're looking at the market you know how big is this market right and so we do a little bit of our own checking against what they what what they told us

59:32 uh then we talk about the product here um what's the business model there's a few generic slides uh because this was Loosely based on an actual company and I didn't want to you know put all their actual uh proprietary information up uh but you know traction right how far are they how far along that they come is there evidence that somebody's paying for what they want they're doing um pricing right so we really dive into all the details of the business so that

59:59 we understand uh what the model is and that it's for real uh here's that cap table again right there's this an old version of the tool that we use um and again management milestones we get to a rationale you know high level this is why we want to invest right um and this is the fun part for me is this is the really this is the independent research right so this is the section having been an investment

60:24 analyst for most of my career um this is where you pull from resources out there that are you know third party and not related so you can triangulate and actually see okay there's a real case here and I've been able to verify it through third-party information um and so you know you put together the market context what are the trends remember I talked about what are the trends going on uh what researchers out there does a lot of public research

60:47 available on the internet now especially from companies like ey McKinsey uh and such uh so we kind of really build the case here independently right so this is this is us um saying okay we see the business case here and this is not from the entrepreneur this is our own research into the market and the trends uh we talk about you know the technology Etc um understanding of the competition what the competitive Advantage is what's the

61:15 edge um and remember I said before anything you need to actually back up your um uh hey you're welcome all right so Seattle uh and so when I said anything you need to back up your case well this isn't the standard thing but in this case I actually this is for real um I found an analog a company with an analogous business model in a different part of the industry and that showed how this thing could actually succeed right

61:44 that there's an actual Pathway to get there and so there's evidence that this sort of thing has been done before that we can take from and so I included that as part of this uh presentation right that there is a Indian you know in another industry something similar has happened a bit of a risk assessment right as we talked about and then anything else in the appendices you know the due diligence checklist will use to show

62:08 um you know okay we've checked all these things certain things weren't applicable some things are still in progress at the time of the investment committee that happens because we're waiting on documents um reference calls right we'll do a bit of a summary on the reference calls and whatever else is needed so yeah hopefully that gives you a sense of like where does all that information and research go right we do all that due diligence and and what do we do with it

62:32 and that's document that we use to tell the story of of uh why we want to invest in the company awesome hey Arden it looks like we got a live uh question from Ulysses yeah please right thank you uh can you guys see now yeah yeah uh can you explain a bit more on the process that VCS or Center that processors most VC will go through to potentially we uh pick winners if there's if there's a science behind it

63:02 the process to people is that I'm gonna I'm gonna start a question can we actually if there's a science can I can do this to science or or just luck right because I think there's a little bit of a uh you know some some sort of a cloud behind that the the events of picking winners or potential winners and we don't just know whether there's a standardized process to pick winners or if we can just decorate these two luck

63:24 and if there's a process of decision analysis process can you just sum it up to maybe the critical success factors that VCS will go through I will look into the critical metrics of success that will that will want to have uh when you analyze a deal on you know very old stage last the billion dollar question isn't it um and I like how you framed it is there is there a science to it or is it luck

63:50 it's a bit of both and I think for me particularly coming from being fortunate enough to have professionally managed and invested in three different asset classes in my career uh I've learned one thing about investing and and that is is that I mean is that there's no guarantees and that um it is never to Discount especially and this this also uh um this also applies to businesses it's to never discount the impact and influence

64:21 of just blind luck sometimes the entrepreneur in the business is in the right Market at the right time uh sometimes they're not sometimes as an investor you pick a a company that you know um like it's easy to look in hindsight right um like when you know you have you see a company that had a massive exit that nobody saw and an early investor because like yeah I was an early investor that they could have failed nobody knew but

64:48 it might just be that this other company at the time suddenly had a need a change in their strategy and they suddenly really needed this company and nobody could have seen that 10 years before so there is a there is a degree of luck of serendipity to it I think and I mentioned this earlier the thing about being a professional investor is is you have a discipline and a framework that you can explain that helps you to

65:12 manage risk and to evaluate your decisions and again it is a game of Risk and reward you know it's it's not about picking winners I don't like using that phrase uh because if we could pick winners and then we wouldn't need to work right we you know you just basically look out there run through your formula invest in the stock market I wouldn't be sitting here talking to you today I'll be in the Bahamas so oh

65:35 you know I think what it comes down to in being a discipline investor is just understanding you know is it's like gambling right is understanding the risk and reward and then going for it and then you know it's a roll of the dice at that point uh but I mean what kind of odds are you going against you know uh how are you mitigating stuff and the big the big um I think the big uh wrench in the system

66:00 is people you know you don't the number of times I've seen companies grow and because the CEO or founder is basically you know kind of lost it and decided to take things in a certain direction it didn't make sense or there was a co-founder that suddenly you know got an ego about him and decided he didn't want to sell a company for a certain price or like there's just so many unpredictable factors out there I think anybody who

66:24 thinks that they can pick winners consistently um is likely fooling themselves and hasn't you know um and good on them there are some very uh famous Venture investors out there who on the world of Twitter you would think are you know they're always touting how good they are and how they can pick winners and you've gotten no shortage of fans but I used to I wish the best way I can describe it is I used to work in the casino industry right

66:50 many years I was a croupier that's where I understood uh you know I built Blackjack craps roulette Baccarat and I got to observe a lot of human behavior and gamblers right investors and you know there's no shortage of people who will talk about their wins but you never hear about their losses right and that's a that's a major problem especially vcuo because when you look down into numbers the success rate is very low it is like Facebook and

67:18 Google that have had early Investments we think that every investment especially in software software companies we think that they're all going to become unicorns when truthfully there's only a very small amount of these organizations that receive Investments and eventually become absolutely interest so and that's why you have to as an investor you have to divorce yourself from the emotion of it and from the ego right take no credit except no blame run a process focus on

67:46 running a good process and you'll get a good outcome focus on the outcome you're going to make decisions for the wrong reasons and you know like I said I sometimes it is pure luck and so all you can do as an investor is feel I think uh the way you I think the way you can you you measure your own success as an investor is of course you have to make returns over time if you don't make

68:10 returns for your clients no one's going to invest with you right this is being a professional money manager but knowing that you have a very clear sense of how you look for value and that more often than not or at least in enough times it works that's the best anybody can do right so I you know I wouldn't fool myself into thinking like even if I had a company in the portfolio suddenly we had a 20 billion dollar exit and I could

68:35 retire I would never look at that and say yeah I picked that winner you know it was like okay all the factors were right and it fell into our process and our process captured that and I think it's important to remember that as an investor and not get ahead of yourself with your own with your own ego interesting and and lastly because I want to multiply the word as well sure if can I create this success or mostly

68:57 success to uh to luck or to gamble what does the due diligence and so-called decision analysis processors for except from collecting information that may never never be accurate especially in the case and now we want to focus on stage Ventures right we're collecting a bunch of informations and three-year five-year projections that are totally inaccurates clients that may never get served the way we expect them to an organization is that's going to Pivot

69:27 two three four times before actually becoming successful and generating you know million dollar uh revenue on an annual basis so what what is these due diligence and and fake decision analysis process search for because we know that most of this information is totally inaccurate and I don't discredit the the the no no I mean uh you can absolutely go in there and one statistically it doesn't make sense I'm just looking at it it doesn't make sense it's very

69:53 exciting but remember what I said earlier right having a process means you get to revisit it so you get to look back and go where did what was there something else that we missed what did we look at what was the factor there that we can learn from if you all you're ever doing is get guessing if you say I like this entrepreneur I'm going to invest in that one I'm going to and if you're an angel investor with your money

70:14 go ahead but what ability do you have to look back and learn right but if you have your due diligence set and you have your investment memos like that absolutely allows you to go back and go hey we got this wrong right or this is what we were thinking at the time and this is how we can adjust our thinking going into the future um and I'll like I said I'm the first to admit that you know uh at the end of the

70:38 day there's a big luck and uh factor that goes into it uh no matter how hard working or smart or intelligent uh somebody is you have to hit the market at the right time but if as again remember I said as a professional investor are you going to go when you go out there and you're trying to raise a 400 500 million dollar fund how would you convince a pension fund to invest 100 million dollars with you by

70:59 saying oh we just guess yeah we need to have ways to explain how we need to see because it's risk management it's understanding the risks of reward ratio and you can't understand that without doing examination also you could also line up in those situations in the early FTX right now the security the SEC is is investigating the a lot of the investors saying what due diligence did you do uh because you have a duty to look after

71:26 your pension uh investors money your people like me and you so you have to show that you've done some care there's some legal and fiduciary uh information I don't want I don't want to be flipping mixing like well it doesn't matter because it does matter I just want to make sure that um nobody mistakes that for this is a guarantee we're going to win this is a guarantee for a winner it reduces the risk a lot of different risks right and

71:49 it allows you to formulate your own view of the world of like okay this is what's important to us and this is what isn't and you have to justify your investment so um hopefully that answers your questions I'm happy to hand it over to Michael and I'm just wondering if I'm just looking at um I appreciate your response very honest very direct as well um thank you um yeah thank you thank you Aaron again uh there's one in the chat here but I'll

72:14 just go real quick just in reference to your the deck you just shared at that point when you're presenting to your investment committee is it um you've made your decision you want to invest in this company you're confident you do limits is done what's the atmosphere in the room is it sort of I wouldn't say adversarial but are you proving it to them are they basically saying oh looks like you've got everything together we're good to go or is it more you're

72:37 really happy to proving it you're you're a True Believer at that point it depends um because I have percentages different investment committees for different kinds of organizations so remember we're all made up of people you know you could have I've had investment committees uh that were always combative and Incredibly you know people who had no clue what you were presenting didn't prepare themselves they found their job was to beat you down and and to try to find a way to say

73:04 no and there's value in that but I have met investors who were doing that more out of ego than than anything um I'm very fortunate my investment committee is what I would say is collaborative and what they will do is they'll challenge us if they see the thinking right um but they want to work with us to make sure that we've covered the whole thing the whole point of investment committee for us here is making sure we didn't

73:27 miss anything and that we are investing according to thesis and we don't we aren't married to uh we haven't fallen in love with the deal right just because well we you know this is a hot area AI you know we're all we're on the highway and uh we don't we'll miss out well then the investment committee brings us back down to earth and say well you know your exit analysis shows that you're probably only going to get this price we might

73:50 only get a four times return on our investment is that going to be enough to make the fun so there's a reality check is probably the best way to put it but I'm very unfortunate to have a great investment committee that's uh collaborative like that and supportive but by no means is it a rubber stab in a pass especially if you've gotten to uh excited about it I guess you missed something like that or it's kind of a

74:13 check on that or the founder being a little too charismatic and being able to yeah to sell a little too effectively great but that's all also why for our fund it's important we have a team approach to it you know sometimes have a partner approach where as long as like an individual partner will take counsel from others but they have the overriding decision us our group um I think the best way to put it is always reminded once early in my days

74:35 with the fun it's the accelerate fund not the Arden fund and so it's important remember it's very easy as an investor don't like make no mistake about it when you're handling money and you're making decisions that are important like that it can easily get to your head you know I've seen it happen to the best of people out there and it's important to have it to me you have a team that keeps you grounded and reminded of the responsibility you have

75:00 and the reality of what you're doing that's great yeah I love that too you kind of you have the team that you trust enough that if they tell you you're wrong you believe them you know exactly thank you I appreciate it my pleasure thanks for staying late there's a few um here we go other particular areas where you find yourself asking funds for additional information during due diligence how you know George I can't say that there's any one particular like that's

75:23 why we have a um that's why we have a checklist and a process uh and every case is it just depends on the stage of the company the industry it's in um but I think the I mean the main question we're trying to ask ourselves is you know how the first question is what are the chances this is going to succeed right because that's tied into how we're going to make money and then once we figured out okay what

75:48 our comfort in the level of of whether or not the same will succeed then it becomes a question okay well how big could this success be right and then that's we kind of work backwards in figuring out the price for paying and the risk uh the risk reward analysis the challenging thing with this is It's not like public equities where you actually have ratios and numbers and a lot of public data and you can't come up with something like you know a sharp

76:09 Ratio or something that actually gives you an indication of okay you know the rest of the reward is viable this is more of a gut feel but it is it is still necessary to understand if the the order of magnitude of the risk and reward analysis and that's what we try to do and this sort of what sort of soft skills are needed to turn down Founders after the due diligence process um I guess it varies and depends on what

76:33 kind of investor you want to be um let's just I think the way that Pat would put somebody down is different than the way I would put it and they're not wrong either way but you could probably tell we have different personalities and uh it's different for everybody but I think for me the most important thing in turning down an entrepreneur is giving them a rationale and not just leaving them thinking like oh like why did you turn me down we were

76:57 talking we were in this why are we done like and even before the due diligence process when we've actually been you know talked to somebody or somebody has applied you know we will frankly say you know here's the two or three reasons why we aren't investing at least so they understand and know when there's some learning there and sometimes it has nothing to do with them you know it's just it doesn't fit our fun it'll likely

77:16 find an investor somewhere else and that's just uh that's the way it is but I think uh a little bit of empathy can't it doesn't hurt um and um respect I think that's important and then I think we got a we got a good one up there in the chat by Joshua um yeah sure he said what role does social proof play in due diligence uh for instance if you got a cat table and Sequoia or a notable VC is on it how do

77:48 you avoid that influence he was lying if I said it didn't play any role at all I think the important thing is to understand it's it's tough to see something like that and then and be like oh no no we're not going to count that at all we have like you have to do your own analysis right at the end of the day but I think what's important is to understand why is that investor investing every fund is

78:12 different every fund has different Dynamics and what they look for and so if it's another fund that we've worked with in the past that we're aligned in the same you know the way we look at things because for example if there's a fund that goes in and they're a big name but we know that they overpay and they overpay because they have a much bigger fund and they're playing Moneyball like they're out there you know they're

78:33 basically able to invest in you know a thousand companies in the portfolio that's a different strategy than us we can't write on that strategy because we have a much smaller fund but if we have another fund that we know they do the similar level of due diligence they look at the same things as we do and they have enough uh you know capital in order to do a follow-on round uh so we're not the only ones that are at risk uh you

78:55 know the if there's more money needed sure that'll have more weight so it is important not to get Star Struck because as much as for example I'm a big fan of Sequoia right um that was a company I've been following for years that I kind of learned a lot about Venture from following Don Valentine the Sequoia of today is not the same as the Sequoia of you know the 80s when Don started it and their principles and so I would have to

79:21 sit back okay who's the investor why are they but I mean um there's no denying that there is a certain degree of hype that help that in certain Cycles can help um very very much so especially in the last five ten years going forward I think a lot of that investors have taken a bit of a beating and so that shine for a lot of big firms might not be as good but if they're a solid investor with a

79:46 track record there may be other reasons you want to follow but I would never want to go in just the name we'll just say that any any others as we as we round into the the dinner hour if not I am happy to uh make myself available for questions down the road um or see you all at an event I think it's amazing what you've been able to put together uh Evan Omi um you know you guys

80:17 it's encouraging to see so many students uh and people interested in the Venture space so having been a finance professional an investment professional here for as long as I have uh always happy to you know to help out offer any sort of guidance um and talk to anybody about the industry awesome well Arden thank you so much for your time um everybody that's still on the call uh we will have this recording and uh or in

80:46 slide deck available uh after the call we'll send it out an email but thank you for joining us and make sure that you come out next week for Craig Leonard from graphite Ventures to go over deal structuring but uh other than that we'll see you next week and thank you very much for joining us have a good weekend everyone thank you Arden bye