A Deep Dive into Diligence — with Mark Bernfeld

Part 2 of Prof. Mark Bernfeld’s workshop series was held on the 8th of October. A week before, on October 1st, we had engaged in the 1st part of this interactive series — ‘An Introduction to Angel Investing and Venture Capital’. We were now ready to delve deeper into the investment process and practice some of what was preached. As always, Prof. Bernfeld ensured a highly insightful and educational, yet entertaining, evening for us all.

Mark is a professor here at Northeastern, teaching one of the most sought after classes in the business school: ‘Entrepreneurial Finance, Innovation Valuation and Private Equity’. Surprisingly enough, he started his career — following his studies at Dartmouth and the Wharton MBA program — in the field of insurance. He moved on to entrepreneurship and consulting. He is now an accredited angel investor (with Launchpad Venture Group) with a commitment to cleantech ventures. Mark is also a partner at Clean Energy Venture Group and the co-founder of Mentorworks, along with NUImpact Faculty Representative Karthik Krishnan.

• Why do startups need funding?
• What are the types of financial instruments available to a startup and which one is their best option?
• Are signs of a high profit good for a startup at the very early stages?
• Why is an investment strategy important?
• What does the actual process of investment entail?
• What signs should an investor look out for during a pitch?
• Why is a quick due diligence so important?
• Why is it important to get expert opinions during diligence?
• How can terms be constructed to ensure the best fit as per the characteristics of the fund and the investment?
• What are some types of financial instruments that can be used when investing in startups? — convertible notes, debt + warrant, SAFE, preferred equity

These were some of many topics touched upon by Mark throughout the workshop. He also used our many questions as starting points to some very interesting dialogues.

The investment process usually begins with the sourcing of potential investments. These startups are then scouted through a preliminary look into their slide decks, and most are eliminated at this stage. The startups who have been successfully scouted will now have the opportunity to present their 15–20 minute pitch to the investors. If they survive this round, investors will follow up with their due diligence. The next step is to negotiate the terms of investment before making the actual investment. However, it is not over yet. The investment process here, is very long-term oriented, and the ongoing support to help the startups do better is very important.

One of the most crucial parts of the investment process is due diligence. It needs to be objective and thorough, but also quickly completed. By the time the investor reaches this phase, more than a month would have passed from the receipt of the startup’s application. There is now a need for a fast pace — in order to meet the startup’s timeline and ensure their continued survival. Due diligence is the opportunity for investors to take a deep dive and validate both the truth behind the CEO and team’s words; as well as the possibility of the startup’s success on both an impact and a business sustainability level.

While the leadership team is one of the most important considerations of the diligence process, it can also be one of the easiest. One of many things to look out for in a team is their diversity. This can be diversity in gender, race, sexual identity; but it should also include diversity in thought, skillsets etc. Mark expressed his hopes that NUImpact would intentionally confront the issue of diversity, or the lack thereof — and we intend to do so, to the best of our abilities.

Another important question to aim at the potential investee during diligence is “Why you and why now?” — why are they the right people to bring this product to market, and why is now the right time to attempt at solving that specific pain point/problem? It is important to make sure there is an established dissonance, that pain exists and needs to be solved.

Market size and competition are some other factors needing to be researched. Who is the company’s competition? What do they do? How well funded are they? Why are you better — i.e. your sustainable competitive advantage? This last point, especially, needs a lot of research as well as imagination — in order to find out not just where the company is, but where it is heading. If a startup leaves these details out of their pitch deck, you will know there is something wrong. There’s a lot of work here that the diligence team can take notice of and get involved in.

An important aspect of both the due diligence and the pitch is the business model. If the startup cannot properly explain or has not included a viable business model in their pitch deck, it is a very bad sign. There needs to be an understanding on how the company expects to make money and how they expect to take their idea to market. At this point, it is also crucial for the investors to actually go out and talk to people — potential/actual customers, suppliers, distributors etc.

As we neared the end of the workshop, Mark led us through a final activity and discussion. We went through a pitch deck previously presented by a startup, where we used what we learnt from the previous hour to determine whether the startup would pass further into the investment process. It was an interesting exercise to gain insight into the thought process behind an investment. This will most definitely prove useful as we make our way into developing and actively participating in our own impact investing fund.