venture capital due diligence

Venture Capital Due Diligence

Robert CarrollOasis500

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A Great Resource

Venture Capital Due Diligence: A Guide to Making Smart Investment Choices and Increasing Your Portfolio ReturnsBy Justin J. Camp, 2002

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Why do due diligence?

• VC is a game of risk• 3 out of 4 startups fail• Everything is based on assumptions. In due

diligence we make sure our assumptions are sound.

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Three Stages of Due Diligence

• Stage 1: Screening Due Diligence• Stage 2: Business Due Diligence• Stage 3: Legal Due Diligence

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STAGE 1: SCREENINGThree Stages of Due Diligence

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Screening

• Companies get screened out for two reasons– The opportunity does not fit the fund’s mandate

or criteria• Business stage (idea stage, early stage, etc.)• Geographic region• Size of deal• Industry sector

– Some funds will only review opportunities that have come via a referral from a trusted source

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STAGE 2: BUSINESSThree Stages of Due Diligence

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Founders and Team

• Personality– Capable of sustained intense effort– Able to evaluate and react to risk well– Articulate in discussing venture– Attends to detail– Compatible personality

• Experience– Thoroughly familiar with market– Demonstrated past leadership– Track record relevant to venture– Referred through trustworthy source

Criteria Used by Venture Capitalists to Evaluate New Venture Proposals by Ian C. MacMillan, Robin Siegel, and P.N. Subba Narasimha

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Business Model

• Mentally walk through the business model generation framework– Key partners– Key activities– Key resources– Value proposition– Customer relationship– Channels– Customer segments– Cost structure– Revenue streamsBusiness Model Generation by Alexander Osterwalder and Yves Pigneur

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Go to Market

• Can the company articulate their value proposition simply?

• Can the team explain how they will go to market?

• Do they have a good understanding of the competition?

Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz

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The Angle

• What insight has the founding team made that the market hasn’t yet realized?


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Market Size

• Do your own research on the market size. Are their assumptions sound?

• What kinds of moves are the incumbents making?

• How might a startup disrupt the market?


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Team References

• Look up people on LinkedIn who know the founders

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Industry References

• Call a few people who know the industry well

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Customers/Users

• How many users/customers do they have?• How does that compare to other startups that

operate in the same/similar space?

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Product Roadmap

• Where is the product/service going?• Does the team have a competitive/ambitious

roadmap?

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Financing Plan

• Are the assumptions made in the financial projections sound?

• For seed stage:– Are they raising a reasonable amount to get

through 3 months? • For growth stage:– Are they raising a reasonable amount to get them

through 12-18 months?

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STAGE 3: LEGALThree Stages of Due Diligence

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Legal Diligence

• Have the lawyer look through everything.• “I’m interested in learning how well formed the

company is, if there are skeletons in the closet like fired co-founders or large debts or consultants who are owed shares or pending lawsuits. I’m also curious to see how a founder negotiates (though this comes through after the term sheet has been issued).” – Tomasz Tunguz


venture capital due diligence

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