I’m about as Midwest as you can get. I was born in small-town Indiana to a fourth-generation Hoosier farmer and my early childhood was spent playing “farm” with miniature International Harvesters. We traveled across miles of flourishing, flat cornfields to visit my grandparents and cousins on my mother’s side just outside Peoria, IL. When I was in high school my family moved to a Big Ten collegetown. We vacationed at a sandy, spring-fed lake in Michigan. For college I went to Chicago and majored in economics at one of the finest “freshwater” economics institutions.
We’re frequently asked by entrepreneurs about what things we do to bring value to the table beyond our capital. The vast majority of the time this is refreshing and well-received, as we want to work with founders who are smart and strategic enough to be selective and intentional about who they partner with.
From our count, M25 is one of the most active seed investors in the Midwest with 23 new portfolio companies in 2016. That may sound like a lot, but it’s a small percentage of the myriad of companies M25 has reviewed. How do potential companies stand out? Victor Gutwein, M25’s managing director, outlines the top four components to their proprietary scorecard.
There is no consensus about what constitutes good due diligence when in the convoluted sphere of early-stage startup evaluation. When a co-investor asks “Have you done due diligence already?” or when a tag-along angel investor claims “Well if they’ve [Respectable VC Firm] done their due diligence then that’s good enough for me”, they often have only a limited understanding of what effort was actually undertaken. In addition, there are often unspoken and competing ideas around the due diligence process’s actual purpose. Therefore, in the spirit of better communication to entrepreneurs who pitch us at M25 Group, LPs that invest in us and co-investors who trust us when joining a round alongside us, I’m going to outline our view on the due diligence process, what our due diligence process looks like and what each piece of the due diligence process actually entails.
Let’s start off with full disclosure — I’ve invested in what M25 is doing in more ways than one, and inevitably have some inherent biases. I’m wearing multiple hats as author of this blog. I’m on the board of M25, I’m an investor in both funds M25 has launched, and I’m the father of the Managing Director of M25. That being said, I’m prepared to tell you by the end of this writing why I believe M25 is the “best thing since sliced bread”.
As I’m beyond excited to be officially settled here in my new role with M25, I thought my first contribution to the blog would be a message out to my brothers and sisters on the startup side of the equation.
In early-stage startups, the future is unknown and can’t be predicted.
Every founder knows raising seed money is hard — there is no getting around it. You’ll meet with 50 smart VCs and angels and get 50 different answers. Some love your company and want in right away. Some give you that second-best outcome — the “quick no.” Many pick and pull at different aspects they want to change, hemming and hawing at “maybe this” or “if only you had that.” It’s certainly incredibly frustrating as a founder, but it’s also very difficult for the investor. This is primarily due to inherent difficulties in evaluating startups: there is an enormous degree of subjectivity involved in judging seed-stage companies.
In the startup world, it’s common to poke fun at the “Startup” language and optimistic spin so common in early-stage founder pitches. I was joking with a fellow angel investor a few weeks ago about how the pitches we hear often start to sound the same, and how therefore I’m constantly writing similar words and phrases down in meetings with founders (because I’m old-school and take hand-written notes). That was the inspiration for this satirical early-stage investor “stationary”, ideal for taking notes during your first meeting with a founder (soon to be offered on Amazon.com for $14.99 for a 20-sheet pack — “the ideal gag gift for that VC that doesn’t need anything!”).