A case study on due diligence.

1. A Due Diligence Case Study
The following presentation was captured from fictitious member notes of a
“diligence check”, often referred to as “due diligence”, on what could best
be described as a well known but fictitious enterprise (company).
The due diligence team researched and reported on the enterprise’s
market opportunity, product, intellectual property, competition,
financials and management, with a recommendation for investment for
the group.
This case study is offered as a teaching tool that describes the minimal
themes of a due diligence check (keywords bold and italicized ) and will
hopefully prepare perspective companies for such diligence checks in the
future.
A Due Diligence Case Study
©2010 Tech Coast Angels

2. Executive Summary
This enterprise has over 300M potential subscribers that generate
revenue in excess of $2T (yes, trillion dollars!) per year. They have
a unique product that so far has been unmatched by the
competition.
There are barriers to entry to competition and the intellectual
property of this enterprise in terms of human and technical
capital is enormous.
The future should be extremely bright for this enterprise.
That said, management’s spending is outrageous. Even with $2T in
yearly revenue run rate, management is running a deficit, taking
on huge debt and delivering less quality service to subscribers.
Many independent projections show this financial path to be
unsustainable.
We invest in teams, and after many long meetings with this team,
we can’t get them to recognize their problems and address them.
We find this team to be un-coachable and therefore recommend
not investing in this enterprise in spite of all its positive aspects.
Details follow…
A Due Diligence Case Study
© 2010 Tech Coast Angels 1

3. Market Opportunity
* 300M subscribers with many more expressing interest to
have access to services
* Expanding subscriber base , both organically and
additionally via new subscribers moving into geography
* Grouping of subscribers into 50 semi-autonomous
geographical regions, all forced to use services (a moat
or fence)
* Large resources available from geographical regions:
human, natural and intellectual
* Region, as a whole, has goods and services exported all
over the world
In Short: Large market opportunity that fences out
competition with growing subscriber base for services.
A Due Diligence Case Study
© 2010 Tech Coast Angels 2

4. Product
* Product is “services” paid by subscription fee
* Services include safety services, infrastructure, health,
education and other common services, some required,
some seen as entitled by subscribers.
* Product fulfills basic wishes of subscribers but there are
many potential areas of improvement; product seen as
unique
In Short: Product is a service-based business that
satisfies basic subscriber needs but has many potential
areas for future improvement.
A Due Diligence Case Study
© 2010 Tech Coast Angels 3

5. Intellectual Property
* Large base of human and technical IP (intellectual
property)
* Subscriber of service being the single largest IP
component: extreme “network effect”
* Research and development rarely matched in breadth
and depth
* Educational/training: although not perfect, supplies
ongoing potential increase in subscriber base (and fees)
In Short: Network effect among subscribers and large
human and technical IP; probably unmatched by
competition.
A Due Diligence Case Study
© 2010 Tech Coast Angels 4

6. Competition
* Competition is abundant but switching costs are high
due to geographic boundaries
* Competitive services are collectively worse with
some individual services more enhanced
* Competitive subscription fees are clearly inferior:
generally much higher fees for equivalent, and in a lot
of cases, more inferior service
In Short: Competition is numerous yet high switching
costs due to geographic boundaries essentially “fence out”
competition.
A Due Diligence Case Study
© 2010 Tech Coast Angels 5

7. Financials
* Good news: Graduated subscriber fee - subscribers
generally pay more for services based on income;
over $2T yearly revenue!
* Bad news: management spends over $2T and may double
expenditures in coming years
* Bad news, II: in addition to deficit spending,
management is taking out loans with interest that will
in the long term be unsustainable given financial model
* Bad news, III: management is taking loans from the
competition!!!!
In Short: Given a rational expenditure plan, management
could be turning profit and paying down existing debt.
A Due Diligence Case Study
© 2010 Tech Coast Angels 6

8. Management
* Management is in turmoil: two camps, both of which
won’t address spending issues; just finger pointing
* Gridlock: no real formal plan for future, no rational
discussion or coordination for controlling spending
in conjunction with subscriber fee increases
* Due diligence team, after several meetings, could not
get management to a) admit there was problem or
b) come together with a coordinated plan to fix
problems
* Due diligence team feels this management team is
un-coachable, they will not take reasonable input and
address, or even admit to, obvious problems.
In Short: Fractured, un-coachable management. Poor
or no planning, no product or financial future roadmap.
A Due Diligence Case Study
© 2010 Tech Coast Angels 7

9. Summary
* Unique product
* Large growing subscriber base
* Great revenue stream but spending/debt to match
* Large barriers to entry
* Good competitive position
* Un-coachable management team which makes this deal
not an investment option
For more details see: Wikipedia U.S. Budget 101
A Due Diligence Case Study
© 2010 Tech Coast Angels 8

10. Who are the Tech Coast Angels?
Tech Coast Angels, www.techcoastangels.com, the largest angel investor
network in the United States, provides funding and guidance to more
early‐stage, high‐growth companies in Southern California than any other
investment group. Since its inception in 1997, TCA members have focused
on building valuable companies, personally invested more than $100M,
and helped portfolio companies attract more than $1B in additional
capital, mostly from venture capital firms.
TCA members give companies more than just capital; they also provide
counsel, mentoring and access to an extensive network of potential
investors, customers, strategic partners and management talent.
TCA has more than 300 members, including its venture capital affiliates, in
five networks in Los Angeles, Orange County, San Diego, Westlake/Santa
Barbara and the Inland Empire.
A Due Diligence Case Study
©2010 Tech Coast Angels