Outside the Shark Tank: Mock Due Diligence


By: Elizabeth Usovicz, Principal of WhiteSpace Consulting, as part of a series she writes for ACA aimed at entrepreneurs, "Your Pitch is Just the Beginning."  

On the reality television series “Shark Tank,” an estimated 50,000 entrepreneurs compete for 125 on-air slots each season. While the pitch dynamics and deal-making are high energy, there’s a reason that the next step in the funding process is not on the show. According T.J. Hale of Shark Tank Podcast, due diligence craters an estimated two- thirds of the on-air deals.

Pitching in the real world may not be as vicious, but the fact remains that all investors perform some level of post-pitch due diligence before finalizing a deal. Startup incubators and accelerators offer many types of support to help founders prepare for this process, including mock due diligence. One is St Louis-based ITEN. I recently spoke with Jane Vancil, an M&A specialist and ITEN Entrepreneur in Residence, about due diligence preparation. Here are her perspectives on preparing for the post-pitch review.

Prioritize Due Diligence: “I try to get companies started on due diligence from the get-go.” Vancil says. This means ensuring clear documentation for assets such as intellectual property ownership. For example, service level agreements for outsourced application development must identify source code ownership and restrict re-use of that code by the developer. The clarity also applies to tax liens, litigation, company formation and operating agreements. Vancil recommends that founders compile essential documents into an easily accessible folder.

Do a Mock Review: A mock process is not a substitution for investor due diligence. It’s a best practice of large corporations preparing for mergers or acquisitions as well as for investors. Vancil notes that ITEN’s due diligence reviewers are investors themselves, as well as functional experts. “Getting feedback from real investors can help founders identify and resolve issues before they are raised in actual due diligence.”

Evaluate Founder Soft Skills: In addition to reviewing company documents, potential investors often consider how a founder or team interacts with others. During ITEN’s mock pitch and due diligence, reviewers provide founders with valuable observations on their communication skills. “Founders can also ask reviewers or mentors to observe their interactions at entrepreneurial events and provide constructive feedback,” she suggests. 

Use an Online Tool for Due Diligence: ITEN uses Transaction Commons to provide companies and reviewers with access to mock due diligence documents (author’s note: Elizabeth Usovicz serves as an advisor to Transaction Commons). For due diligence, Vancil recommends using an online tool that provides email alerts, as opposed to a shared link. “ITEN reviewers are busy people who may be doing a late-night review after a long business day. When a company-provided link to an online folder is broken, it can sometimes delay a review by up to a week. ITEN reviewers get email alerts (via Transaction Commons) when a founder has uploaded documents, and control their own access.”

On “Shark Tank,” the investment offer precedes due diligence. In reality, due diligence precedes the deal. Mock due diligence may not be the most exciting step in the preparation process, but it can be the difference between a deal that floats and one that tanks. 

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