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The guiding principles of our investment and post-investment monitoring process are: *We seek investments in companies that have strong management teams, address large markets, create an attractive business model and have a defensible competitive advantage. *We work collaboratively during our due diligence process, with two partners focused on each investment opportunity and ongoing feedback from other partners. *We are active participants in building our portfolio companies, closely aligned with management and active in the boardroom. *We leverage our broad and deep networks to accelerate the growth of our portfolio companies.
Team-Based Investment Process
We have a consistent, team-based approach to our investment process for both initial investments and follow-on financings for portfolio companies. Typically, the partners meet each Monday, along with the rest of our investment staff, to review the pipeline of investment opportunities, provide updates on portfolio companies and meet with the management teams of prospective portfolio companies. The process is collaborative and provides an opportunity for the partners to share ideas for new investment opportunities and thoughts on sector trends and projections, and to brainstorm ways in which they can continue to add value and assist portfolio companies. We also actively review the financial market conditions that impact our investment portfolio.
Investment Due Diligence Process
We have a thorough yet efficient due diligence process that ensures that the experience and networks of our partners are leveraged in our examination of a potential investment. Our team approach requires that primary responsibility for each investment is assigned to a deal team of two partners, who sponsor potential portfolio companies throughout the lifecycle of the Rustic Canyon investment process and work with companies subsequent to investment. Each investment decision (initial as well as follow-on investments) requires unanimous approval from the partners.
Initial Due Diligence:
The deal team conducts a preliminary evaluation of the company’s management team, addressable markets, competitive advantages, potential competitors, financial projections and valuation expectations. The management team of a potential portfolio company will typically present at least twice to the partners: once near the beginning of the process and once at the end of the process before financial decisions and funding are completed. If the partners reach a consensus to proceed further, the deal team will undertake an extensive examination of the company’s business plan and operations.
Advanced Due Diligence:
Advanced stages of due diligence involve, among other things, a deeper investigation of company operations, including extensive meetings with management, site visits, industry research, discussions with customers and vendors, and detailed competitive analyses. Often we make introductions to potential customers and strategic partners that help us understand the potential of a prospective portfolio company. While it helps our diligence process, it can also provide the company with a potential commercial opportunity, giving the partners an advantage in a competitive situation where there are multiple venture capital firms seeking to invest in that company.
Specialized Due Diligence:
Through a unique relationship with a premier intellectual property law firm, Irell & Manella in Los Angeles, we rigorously assess the strength of a potential portfolio company’s intellectual property claims prior to the closing of any investment. In many cases, this also helps the company evaluate and strengthen its IP strategy. With regard to the management team, in addition to our own thorough reference checks, we also work with several nationally recognized firms to conduct background checks that examine the legal, criminal, credit and tax history of each executive. To maintain privacy for the management team, these reports are reviewed only by our CFO, who will alert the appropriate partner(s) if any issues arise from the check.
Analytical Approach:
Business fundamentals and valuation discipline form the cornerstones of our investment decisions. Given our extensive experience as investment professionals, we are extremely disciplined in our analytical approach, utilizing multiple valuation methodologies based on conservative underlying assumptions consistent with the current economic and market environments. We document our analyses and findings in various investment memos that are distributed to the Partners and reviewed at our weekly Partners’ meetings.
Closing:
We endeavor to make the closing process as seamless and efficient as possible. To enable our portfolio companies to maximize their corporate effectiveness, we stress the importance of investment terms that minimize conflict among the varying classes of preferred and common investors and the management team. Our CFO and his staff work closely with portfolio companies, their legal counsel and investor counsel to ensure that proper documentation is generated, tracked and maintained.