We recently met with a couple of college students who came to our office seeking the “magic recipe” for due dilligence. They asked what the exact, step-by-step process is for evaluating our investment proposals. While I can only speak for the firm I am working with, the answer is that there truly isn’t a rigid process or recipe in determining whether a company is fit for investment. There are many things that our VC firm takes into account when engaging in due diligence on a company and the purpose is really to gain as much insight and understanding as is possible on the company, the team, and its market potential. We want to know more about the company than the company knows on itself. Some of the basics include the following:
VC DUE DILIGENCE BASICS
- Market Size- how large is the potential opportunity?
- Competition- who is/will be in the space? what are customers currently using to fulfill the need they are solving?
- Competitive Advantage- what is it that makes their offering superior to others? (ie price, quality, ease)
- Intellectual Property- how is their competitive advantage protected? How strong are the patents or trade secrets? How easy is copy-catting?
- Economics- How do the economics work? What is the revenue stream(s)? How is the cost structure? How do their margins compare with competitors?
- Customer Acquisition Model- Is there a real customer need? How will they get the 1st customer? 1000th Customer?
- Team- Can the team pull it off? If not, do they identify what holes need to be filled to do so?
The "Hostel" Venture Capitalist 