This is taken from the SyndicateRoom due diligence report, working alongside Rob Murray Brown. You can download the whole report here.
Most founders and directors will have a LinkedIn page. Most LinkedIn pages are grossly exaggerated. In fact, there are plenty of examples of people outright lying on theirs. It is easy enough to check. Just use the claim and the person’s name and Google it. As a general rule, if one claim is over the top, then they all will be. Then you ask yourself, is this someone I can do business with?
Experience: Successes and failures
What you are looking for is experience of starting, building and selling a business – preferably in a sector with similarities to their current offer. Failures are fine; in fact, you tend to learn far more from them than from successes. Pretending a failure was a success, on the other hand, is not fine.
I can think of numerous examples where founders have been tempted to dress up failures instead of admitting to them and the lessons learned. In one instance, the founders went on to make the exact same mistakes again in their next business.
Google is your friend
A pitch states the company has two company directors, both of whom are successful entrepreneurs with two exits, one of which was of a well-known brand to an internationally acclaimed company for a large multiple. Impressive stuff. However, closer inspection revealed that only one of the two was ever involved in these two exits.
It also showed that while he was indeed a director of the well-known brand, he did not start that company nor grow it. He joined it the year it was sold. So, claiming he had experience of growing a successful exit using this example was stretching the truth. He was a shareholder and did see a multiple return, but not on the back of his genius.
USE INTERNET SEARCHES AND NEWS STORIES TO VERIFY ANY CLAIMS.
Stay on target
A small startup brewer in London raised funding on an ECF platform. Within 12 months, he had decided that this was not the life he wanted. So he packed his bags and went back to the US without closing the company or contacting the shareholders. A few months later, from his new job in accountancy, he posted a closing notice on his website. Companies House later closed the company for failing to file any accounts.
In another case in the same sector, a craft brewer raised a small amount via ECF. In this case, however, they had planned to use this first tranche to explore the market. Things were tough, but the founders stuck it out and found their winning formula.
Once this cash was gone and they had a proven sales record, they came back for more funding and were successful. The business is now forging ahead and exceeding projections.
IT IS ESSENTIAL TO KNOW YOUR ENTREPRENEURS WILL STICK AT IT THROUGH THICK AND THIN.
This may sound a little insane, but it really is worth considering the lifestyle of the founders/directors. They are, after all, what you are investing in. Age, marital status and family all play a part in what they are likely to do over next five years when they have your investment.
There are many examples of ECF-funded companies where the founders have packed it in at the first obstacle citing ‘family reasons’. On the other hand, you will come across hundreds of founders who’ll tell you the reason they are able to keep going is because of the unwavering support they have at home.
Starting and growing a business is a high-stress occupation; make sure your founders are up to it.
A non-exec with relevant experience is very useful; the very fact of their involvement suggests that they believe this business has legs.
Check the non-exec’s experience – it should be in some way related to the project. Check how many other companies they are involved in – they shouldn’t spread themselves too thinly, since for a startup, time is critical. If you know people who know them, ask what they are like as a person.