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How To Check The Health Of A Tech Startup

Doing business with a startup is a leap of faith, but knowing something about its financial wherewithal lowers the risk. Here's how health insurer Cigna vets promising new companies.

I interviewed Cigna chief information security officer Craig Shumard for the article "Evaluating Tech Startups: The Risks And Rewards." Shumard tends to be an early adopter of security technologies from startups as he tries to batten down the company's IT infrastructure from all kinds of threats. When he mentioned that Cigna performs due diligence on a startup's financial situation, I asked for more detail. Thanks to Cigna spokeman Joe Mondy his help with this:

InformationWeek: What kind of person performs financial due diligence? What department are they from?

Cigna: The Cigna Strategic Sourcing & Enterprise Policy unit is staffed with people who have education and experience in finance and financial analysis, usually an MBA and/or CPA. We have this talent within the Strategic Sourcing organization, but we may also partner with representatives from Cigna's Finance or Accounting units from time to time.

InformationWeek: What kind of information do they request/analyze?

Cigna: This is somewhat flexible depending on the size of the company and the nature of the contract. We prefer audited financial statements as the gold standard--which all public companies can provide. For private companies, especially the smaller ones, these documents are not always available, or the companies are cautious about sharing them.

In some cases, we need only enough to evaluate the basic size and health of the company, such as revenue, costs, net income, asset levels, debt load--enough to evaluate basic financial ratios. We also look at subjective data like employee base, years in business, nature of work performed, experience of management, outstanding legal issues, sources of funding, client base, etc.

InformationWeek: In general, how long does this take? Is it an exhaustive process or 15-minute phone call?

Cigna: Again depends on size and nature of engagement. Big projects could take several days if all information requested is provided, but this often stretches out when additional information is needed. In many cases we may follow up with a brief call with management (CEO/CFO), usually 30 minutes or so, to clarify any outstanding or questionable items that may have surfaced in the analysis.

Notably,the overarching theme of any analysis is to determine if the vendor is in appropriate financial condition to execute the contract. Often companies spend too much effort defending losses or negative net income, when in reality many companies lose money early in their development or even large companies take hits from time to time. Many "hard number" factors go into the due diligence, but we also consider the story and circumstance behind the numbers.

For more, see:

9 Questions To Ask A Tech Startup

Why Cigna Chose Startup For Key Security Function

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