What is the selection and diligence process?

Overseen and managed by the Fund’s Investment Committee, selection and diligence proceeds in four distinct phases, each requiring Investment Committee approval to progress.  They are:

1. Initial Review;
2. Selection Committee Review;
3. Broker-Dealer Review;
4. Investment Committee Approval.

Initial Review iSelect only considers companies that are referred by a trusted source – be they a Selection Committee or Investment Committee member, an investor in iSelect, or a fellow venture capitalist.  While iSelect’s investment criteria are constantly evolving, portfolio companies must always:

1. have previously raised more than $250,000 from Angel investors;
2. be raising at least $1,000,000 in their current round led by a credible venture investor;
3. demonstrate meaningful early traction;
4. have proper industry, geography, and valuation fit;
5. set clear milestones and have a path of follow-on capital;
6. articulate a cogent exit strategy.

iSelect seeks to co-invest with venture capital firms, leading Angel investors, and Family Offices.  Previously, iSelect has invested alongside the likes of Bold Capital Partners, Cultivation Capital, Hyde Park Venture Partners, Mercury Fund, and the North Coast Venture Fund – to name a few.  Any referred company must submit a description of its business and a summary of offering terms before meeting with the Fund’s venture team.  Based on this information and subsequent meetings with management, iSelect’s venture team, leveraging proprietary heuristics, makes a quantitative assessment of the business, specifically evaluating:

1. the quality and depth of the company’s management team;
2. the scope and viability of the business opportunity;
3. the terms of the proposed offering;
4. precedent transactions and pathway to liquidity.

If the business merits investment, iSelect’s venture team prepares a comprehensive investment opportunity summary for Investment Committee review, at which time the Investment Committee evaluates the summary and other relevant information to determine whether to advance the opportunity to the iSelect Selection Committee for qualitative review.  Should a referred company warrant Selection Committee review, iSelect’s venture team works simultaneously with the company’s management to compile a complete due diligence file for investors, including:

1. a confidential Private Placement Memorandum (“PPM”) that complies with the requirements of Rule 506 under Regulation D and meets the diligence standards established by iSelect;
2. copies of material contracts, agreements, intellectual property filings, tax returns, financial statements, business plans, designs, concepts, and other information relevant to the business.

Selection Committee Review iSelect has established a Selection Committee composed of industry experts with experience founding, operating, advising, and investing in startup and emerging growth businesses.  Selection Committee members include the founder of Shell Technology Ventures, the director of the USDA’s National Institute of Food and Agriculture, and the founder of CARFAX – among others.  The Selection Committee is organized around principal industry segments in which iSelect focuses its investing.

Members of the Selection Committee meet with management of companies submitted by the Investment Committee, evaluate the venture team’s report, and determine:

1. whether company management can successfully implement its business plan;
2. if there are any necessary preconditions or milestones that should be met before investing;
3. whether any material risks present in the business preclude iSelect investment.

Less a selection process than a rejection process, Selection Committee review is designed to be an in-depth, qualitative assessment by industry experts.  If the Selection Committee does not reject the company or place conditions that prevent it from moving forward, the Investment Committee again evaluates the candidate.  If the Investment Committee determines that the Fund’s criteria for investment have been met, it will submit the company’s diligence file for audit by a registered broker-dealer. Broker-Dealer Review iSelect’s diligence process is designed to comply with disclosure and suitability requirements of federal securities laws and the rules and pronouncements of FINRA, including FINRA Regulatory Notice 10.22.  Before an investment is made available, a licensed broker-dealer reviews the prospective company’s diligence folder (or “VDR”).  VDRs include detailed financial projections (including any and all payments to affiliates of the company), financial statements (unaudited) for the prior three years or such shorter period in which the company has had material operations, all material contracts of the business, all corporate organizational documents, complete biographies for each company officer and director, all intellectual property filings, designs, business plans and any other information relevant to making an investment in the company.  In reviewing each folder, the licensed broker-dealer certifies that the diligence is complete, that the prepared PPM accurately represents the company’s business and meets the disclosure requirements under Rule 506 of Regulation D. Investment Committee Approval If the potential portfolio company and its diligence file are approved by the licensed broker-dealer, the Investment Committee meets one final time to review the company for investment.  In its final review, the Investment Committee verifies whether:

1. iSelect’s diligence process has been appropriately adhered to and documented;
2. the diligence process has uncovered any items prohibiting investment;
3. investing in the company is suitable as part of a diversified startup portfolio.

Any company that satisfies the foregoing criteria may be made eligible for investment via iSelect. The overall objective of the iSelect Fund is twofold: (1) provide investors with access to the compelling historical return profile of the venture capital asset class and (2) provide early-stage companies with the capital they need to grow.  To increase the potential for favorable investment outcomes, iSelect thoroughly vets every venture company before it is placed in the Fund.  As set forth in more detail below, after an initial inquiry conducted by iSelect’s venture team, each company is presented to the Fund’s Selection Committee for review.  At the same time, iSelect begins its due diligence process.

1. Phase I: The Initial Inquiry.  A threshold question asked by iSelect as it begins its inquiry is who has already invested or has committed to invest in the company’s offering.  iSelect will not make a company’s offering broadly available through the Fund unless a recognized co-investor, typically a venture capital firm (or firms), is also investing.  Thereafter, iSelect sifts through the initial candidates in order to identify companies which meet specific regional, financing, market, and business model criteria, selecting only those that meet the criteria for further consideration.  Only about 2% to 3% of the companies iSelect reviews move to Phase II of the process.
2. Phase II: The Selection Process.  The next step involves iSelect’s Selection Committee.  The Selection Committee is composed of venture investors, entrepreneurs and professionals with experience in evaluating, advising, and investing in early-stage growth companies.  iSelect invites companies that have cleared the initial inquiry to meet with members of iSelect’s Selection Committee who have the most specific industry expertise relevant to the company (the “review panel”).  iSelect’s venture team prepares an analysis of the company and its offering and sends it to each member of the review panel.  The panel then meets with members of the company’s management team meet (in person or by teleconference) to review and discuss, among other things, the company’s business plan, the industry and financial results and to identify any areas of concern and possible remedies.  Following their review, members of the review panel issue a consensus report of their findings to iSelect.  Investors should understand that, unlike a traditional fund model and despite its name, the role of the Selection Committee is not to select the companies that will receive investment funds. Rather, the Selection Committee’s role is to methodically evaluate each venture company, specifically its management team and business plan, and identify any intrinsic risks (and, if possible, help the company to eliminate those risks) that might prevent the company from using the proposed offering amount to take the company to its next level of development.
3. Phase III. Third Party Due Diligence Verification.  Following its receipt of the Selection Committee review panel report, and upon conclusion of the Fund’s internal due diligence review process, iSelect determines whether the company, and the documents gathered during the internal due diligence review, should be sent to the independent broker-dealer for review and verification. Upon receipt of the information, the broker-dealer conducts its own review of the company’s private placement memorandum (PPM) and other information related to the financial, operational and legal status of the company, as well as reviewing the background of the current management team (see What IS THE DUE DILIGENCE PROCESS?).  Upon completion of its review, the broker-dealer issues a report, listing any information missing from the due diligence materials and identifying any additional risk factors it believes should be disclosed to investors.  Assuming the due diligence materials are complete, the report is placed in the company’s file in the virtual data room available through the iSelect website.