Consistent with our other posts here, we would like to continue to give insight and transparency around our firm’s processes and thoughts. This post is meant to provide a brief overview of our investment decision process. N.B.- Not every process for every company is the same, though the description below should at least provide some insight into why we do what we do…
The Introduction: A warm email from someone in our network. That is the best way to get our attention. As a group of investment professionals, we are fortunate to receive non-stop LinkedIn messages, cold emails, contact from our website, handshake pitches at conferences and meetings, etc… While we LOVE this part of our job — one of the characteristics that bind KdT together is that we view every interaction is an opportunity to learn about the world around us — these opportunities require more time to diligence given they don’t come with the “trusted referral” lubricant. Regardless of origin, we try to give every idea its fair consideration and aim to provide real-time analysis and communication when we can. For those ideas that most capture our interest, will get a call/meeting set up ASAP.
Initial Conversation: The first call generally runs over our allotted time… with us asking lots of questions. We apologize in advance… kind of. Our first call is generally the most important touchpoint in our relationship since we have to make decisions then and there on whether to “turn on the machine” or not. Diligence and the attention of the partnership take quite a bit of activation energy, thus we encourage entrepreneurs to send any data available — deck, publications, patents, etc… ahead of time to make this as productive a meeting as possible. We know your time is just as valuable as ours, and we don’t want to waste it. As an aside, regardless of whether you get the full partnership or just one of us, we love you equally. All partners would join every call if logistically feasible as a diversity of opinion provides the greatest depth of thought and analysis.
Diligence and The Memo: Not surprisingly, every investment goes through a period of diligence where we speak and meet with founders and key stakeholders several times to dive deeply into the science and business while also performing a thorough external evaluation of the technical and industrial landscape. But what may be surprising is that teams that do the best job of writing our internal investment memorandum (see more below) for us, are the companies that we are most likely to find attractive (generally speaking). This is because when teams clearly communicate why they are best positioned to take advantage of significant market opportunities, not only can we streamline a portion of our own diligence but we can be confident that the founding team has done their diligence. As referenced above, we prepare a comprehensive investment prior to making every investment, which describes the opportunity and the work done to decide whether to invest or not. Many times entrepreneurs ask “what goes in the investment memo?” As we have nothing to hide and value transparency from our partners, below is a brief overview of the different sections which are examined in gory detail… every… single…investment.
Background and Market
Founding Team and Key Employees
Business Model and Strategy
Financing and Financial Metrics
Due Diligence and Technical Assessment Summary
And finally, the KdT team’s favorite- Glimmer of Greatness. This last section is where we get to tell the story in a paragraph or two how Team X is going to take over the world. If everything went right, what would the company look like? How does this asset become a platform, dwarf and eat competitors, and most importantly move the world forward (and retain the value it creates)? Even if only for a couple of minutes, sketching this scenario out allows us to live for a second in the entrepreneur’s shoes and see their vision of the world through their eyes. However small this gesture may be, distilling their thoughts into our glimmer of greatness is our favorite part of the memo.
Final Stages/Decision: During the entire diligence process, we are in constant contact with each other and more importantly the management team of the prospective company. We are likely finishing up our diligence, asking follow-up questions and requesting references to speak to both the business opportunity and the character of the management team. The key to this process, for us, is to keep a constant line of communication open which enables transparency on where we are in the process in real-time as well as what needs to happen for us to make a final decision. Once we make a decision as a firm, we try to communicate this immediately to the entrepreneur, understanding that knowing about a pass is sometimes as important as a commitment to invest. It’s a long game and we are (relatively) young — we know that the better we treat people, the more likely we are to be treated well by our colleagues.
Now the work really begins…