Download - ACS Due Diligence Presentation, Ryan Goral
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Due Diligence
Your Offensive Line, Your Offensive Weapon
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Care and diligence bring luck. Thomas Fuller
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Why Due Diligence is Important Returns are positively correlated to hours spent on due diligence
More than 40 hours = 7.1x returns
Less than 20 hours = 1.1x returns
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What is the right amount of due diligence?
• Due Diligence Sweet Spot ~ 40 hours – Not an exact science and depends on the deal
• More doesn’t correlate to higher returns – Diminishing returns after initial threshold met
• Need to be intentional and deliberate when you perform due diligence – in other words:
Know what you are looking for and where to look for it.
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Due Diligence Process
Phase I – High Level Sniff Test
Phase II – Deep Due Diligence
• Using Mullins Framework
• Due Diligence Checklist
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© 2006 John W. Mullins
The Seven Domains of Attractive Opportunities
Macro
Level
Micro
Level
Market Domains Industry Domains
Mission, Ability to
Aspirations, Execute
Propensity on CSFs
for Risk
Connectedness up
and down Value Chain
Team
Domains
Market Attractiveness
Target Segment Benefits
and Attractiveness
Industry Attractiveness
Sustainable Advantage
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Due Diligence Phase I
Management Team Experience
Produce/Service Description
IP Potential
Target Market Clarity Industry Definition
Valuation Reasonableness, High-
Level Financial Summary, Exit
Possibilities
High-Level Risk Assessment
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Due Diligence Phase II
Management Team Analysis
Product/service comparison to direct
and indirect competitive offerings
IP research and investigation
Details on the target market and break-
down on the company’s marketing
plan
Competitive matrix with positioning
analysis
Valuation comparisons and detailed financial analysis, exit scenarios
and target ROI
Detailed risk assessment
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Due Diligence Product/Service
• Features versus benefits
• What is the pain being solved?
• How does the product/service’s benefits relieve that pain?
• Current product/service alternatives?
• IP potential?
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Micro-Market Analysis
• What benefits does the offering provide
that other solutions don’t?
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Micro-Market Analysis
•What customer pain will the offering resolve? •How strong of an incentive do customers have to give you their money?
–Evidence?
•Will customers purchase at a price that works for the business model?
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Micro-Market Analysis
• What evidence can you provide to show that your target market has the potential to grow?
• Are there other segments that could benefit from a related offering? How do they benefit?
• Can you develop capabilities that are transferable from one segment to another?
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Micro-Market Analysis
• How attractive is the micro-market?
– Fit market into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
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Macro-Market Analysis
•Secondary research
•Number of potential customers How big is the market?
•One year growth?
•Two year growth?
•Five year growth?
How fast has the market grown historically?
•Next 6 months?
•Next 2 years?
•Next 5 years?
How fast will the market grow?
•Economic, demographic, sociocultural, technological, regulatory or natural.
What trends will affect the market?
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Macro-Market Analysis
• How attractive is the Macro-Market?
– Fit market into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
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Industry Analysis Porter’s Five Forces
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Industry Analysis Blue Ocean or Bloody Ocean
“Blue oceans….denote all the industries not in existence today – the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid.”
Bloody Oceans – industry characteristics where companies fight and primarily compete on price.
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Industry Analysis
• How attractive is the Industry?
– Fit industry into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
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Management Team Execution Risk
• Does the management team have the relevant experience necessary to execute the business plan?
– Industry Skills?
– Technical Skills?
– Transferable Skills?
• Passion?
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Management Analysis
• How attractive is the Management Team?
– Fit into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
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Financial Analysis
• What is the company’s revenue Model
• Are the revenue projections realistic? – Has the founders included the details on ‘how’
they plan on achieving these projections?
• Gross, operational and net margins?
• Sources and uses of funds?
• Projections – Management, downside and upside scenarios?
– ROI for investors?
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Financial Analysis
• How attractive are the financial terms?
– Fit into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
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Risk Assessment
• Industry Risk
– Changes to Porter’s Five Forces
• Market (Product/Service) Risk
– Changes in customer preference
• Financial Risk
– Appropriateness of fund sources and uses
• Execution Risk
– Management team execution ability
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Due Diligence Checklist
- Attachment
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Efficient Due Diligence
• How can you work with others to share in due diligence tasks?
– Angel groups/forums
• Deal flow
• Collaboration
• Leverage investor specialties/experience
– Lead investor strategy
– Due diligence delegation based on specialties
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Q&A
Ryan Goral www.separtners-llc.com
Twitter: @ryangoral