Small Business Funding, How to fund a startup, Due Diligence (II)

Each and every Startup must conduct the Due Diligence phase before meeting VCs  for Venture Funding.  This stage primarily evaluates the viability of the business concept for the investor or an entrepreneur. This largely overlooked, or at the very least underrated task is of utmost importance in the lifecycle of a deal. Before we go investing often-scarce resources on a venture, we must make sure that it can achieve a sustainable competitive advantage in the marketplace. Most entrepreneurs would like to get to market before the competition and so in their haste make a tactical mistake of sacrificing due diligence. It’s that run fast or die mentality again. The reality is that one must not only get to market as expeditiously as possible but also allocate sufficient time to researching the business issues. Otherwise failure is eminent. That having been said, the process of due diligence, which involves a great deal of probing and the asking of thought provoking questions, comprises of the following nine steps:

4. Marketing strategy

 The primary purpose of the marketing strategy is to convince the investors that the market can be developed and penetrated. The sales projections made in the marketing section will drive the rest of the business plan by estimating the rate of growth of  the operations and the financing required. The marketing strategy revolves around three primary drivers:

  •  Pricing
  • Distribution channels
  • Promotion

 Obviously, the key here is market penetration. Analyze each of the criteria mentioned above in great detail to arrive at factual data.  Then, with Machiavellian passion, we must position our business to achieve competitive advantage and an increasing market share.  Do you want to buy out your competition, or do you simply want to build up your customer base? Also, what’s the optimum amount you should spend on advertisement? This step will involve a lot of money talk; so don’t be afraid to call up that industry veteran or accountant friend of yours. A comprehensive cost analysis of how you will deal with the competition must be made before any actual steps are taken.

 5. Intellectual Property Considerations (IP)

 This seems to be the issue of the day. In this Internet-driven world, is it really possible to copyright ideas? Well, however you stand on Napster, it is necessary that you create an environment in the market that will protect your idea. Needless to say, protecting intellectual property is foremost on the entrepreneur’s mind. Entrepreneurs are anxious to protect ideas, trade secrets, designs, and innovative techniques along with confidential information. Whether you business will be website-based or not, it is highly recommended that you retain an attorney to draft legal documents to protect your intellectual property.  The following are few of the issues that can be handled by your attorney:

  •  Non-Competition Agreement
  • Confidentiality Agreement
  • Safeguard Trade secrets in accordance with the Uniform Trade Secrets Act
  • Employment Agreement protecting Trade secrets, Inventions and Patents
  • Licensing Agreement
  • Foreign Licensing for Patents and Technical Assistance Agreements
  • Franchise Agreement
  • Research & Development Agreement with Outside Company

 You will want to sit down with your attorney to go over patents and copyright infringement analysis and to develop service documents, such as user agreements and permitted usage rules.

6. Competition

Whether you are first to market or not, each and every product or service will face competition. You should focus on who your competition is and what they or a hypothetical, “best-case-scenario” competitor may have, that you don’t.  With market and timing in mind, you really have to explore why a customer would want to pick you.  To begin with, understand your core competency.  What is your business really good at?  What are the products or services that you are planning to provide? What are the strengths and weaknesses of your offering when compared to your competition?  Capitalize on your strengths and improve upon your weaknesses.  In order to meet and beat the competition you must first and foremost understand your product line or service offering and then the competition. The entrepreneur must explain how the market’s need is currently being met and how the new product will compete against the existing solution.  The venture capitalist will be looking to see how and why the firm will beat the competition.

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2 Comments on “Small Business Funding, How to fund a startup, Due Diligence (II)”

  1. […] Small Business Funding, How to fund a startup, Due Diligence (II) […]

  2. ShamWows Says:

    Hey good post, I did not think I would come across exactly what I was looking for until I came across this site on yahoo!

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