Buy-side due diligence assessment for a VC firm leads to $20+ million equity investment
How a fundraising expert who has raised over $0.5B in his career helped a venture capital firm assess a potential investment.
About the Client
The client is an established venture capital firm based in Washington, D.C., with more than $750 million in committed capital that provides growth capital to software and software-enabled businesses.
Making investments is about taking smart risks. When the client came to Paro, they were looking for a third party to assist them with buy-side due diligence for a potential investment. They needed someone to sit down to evaluate the internal finance staff at the company they wanted to invest in so they could better understand the company’s ability to scale with the client’s potential investment. They also wanted someone skilled at reviewing the accounting policies and controls that guided the department month to month, as well as to understand revenue recognition policies, accrual policies, and audit readiness.
By working with a Paro expert, the client was able to gain the information they needed to determine whether or not investment would be the right choice. After receiving the due diligence report, they decided to make a $20+ million equity investment in the Chicago-based PaaS (Platform-as-a-Service) company.
Every investment is a risk. According to Investopedia, around 300,000 small businesses fail each year. Only 25% remain in business after 15 years. Buy-side due diligence helps investors identify the 25% of businesses that will stay the course.
Paro’s client regularly performs buy-side due diligence on their potential investments. They prefer to keep their due diligence as objective as possible and hire a third party to perform the review. This third party is a seasoned finance expert, someone who knows what goes into a successful business. That’s why the client turned to Paro to help them assess the Chicago-based PaaS startup.
Paro linked the client up with Rich Smolen, a 20 year veteran of the finance industry who knows his way around fundraising. During his career, he has raised over half a billion dollars. He was able to answer the client’s questions about their investment opportunity.
Was this the right team to bring the company into their next stage of growth? Is the company audit ready? Do they have strong monthly close procedures and internal controls in place? Does the company have sufficient policies in place for revenue recognition, backup schedules, and accrual?
One thing the team needed to do was transition between revenue recognition models. Smolen has experience with exactly this transition, and was more than capable of assessing the current team’s make up and capability in executing such a transition. Smolen was happy to report that “the team is solid.”
The team had their policies in place and would be a good investment for the client. Smolen provided a detailed report for the client, delivering his findings. “[He] nailed exactly what we were looking for,” one of the client’s team members told Paro.
Another said the Chicago-based PaaS company “raved” about working with Smolen. “That’s high praise toward someone doing a very deep dive into their work,” he said. Often, it’s hard to manage emotions in a review like this. Many people grow anxious about their work, but Smolen was well received.
With Smolen’s report in hand, the client felt comfortable moving forward with their investment in the company. They ultimately decided to make a $20+ million growth equity investment in the Chicago company.