For the exclusive use of S. SWAIN, 2014.

9-805-033
SEPTEMBER 21, 2004

WILLIAM A. SAHLMAN

Valhalla Partners Due Diligence
It was March 2002, and Art Marks was sitting around a campfire in the Blue Ridge Mountains with two friends from the venture capital world, Gene Riechers and Hooks Johnston. They'd had a few drinks. They'd told some jokes. But, like retired athletes who can't help rehashing old games, the campfire conversation kept circling back to the same place, back to the same topic, and each time they returned to it, their enthusiasm grew. The topic was: due diligence.
While the campfire appeal of a smore or a rendition of "Kumbaya" is short-lived, the due diligence process hatched by the three partners that night in March became the foundation of a $177 million venture capital fund called Valhalla. The partners believed that they'd figured out a better way to do due diligence, one that would give them a competitive advantage in the crowded world of venture capital. A year and a half later, in August 2003, Art Marks was sipping coffee in his office, flipping through an investment memo concerning a company called Telco Exchange (later renamed
Rivermine Software). (See Exhibit 1 for excerpts from the Telco Exchange investment memo.) Telco
Exchange was the first deal that Valhalla had run through its new due diligence process.
Telco Exchange (TX) was a company that developed software to help companies strategically manage their telecom assets and reduce the cost of managing their voice and data networks. TX was seeking a $5 million Series A investment, and Valhalla was deciding whether to lead the round.
Gene Riechers, now a General Partner at Valhalla, and Scott Frederick, Partner at Valhalla, had prepared the investment memo. The memo was unusual by venture capital standards. The most obvious point of departure was the length: a hefty 22 pages, plus many extra pages of summaries from reference checks on the management team.
As Marks pored over the document, he was able to get a clear picture of the company and the challenges it faced. TX had great strengths: an innovative product in a market that was expected to grow, as well as a set of customers who had used the product and achieved impressive ROI. The company also had big challenges, including an unproven management team and a fragmented competitive environment.
As always, learning more about the company had made things clearer and more complex at the same time. At the partner's meeting the next day, Marks would have to vote up or down on the TX deal. Valhalla only made investments with unanimous consent among the general partners, so
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Professor William A. Sahlman and Research Associate Dan Heath prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management.
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This document is authorized for use only by SUBHASIS SWAIN in VCEF - Spring 2015-1 taught by Daniel Bergstresser, Brandeis University from December 2014 to June 2015.

For the exclusive use of S. SWAIN, 2014.
805-033

Valhalla Partners Due Diligence

Marks knew his vote was critical. At this point, Marks was leaning moderately toward approving the investment, but the investment memo had raised some important concerns. He wanted to find a way to address these