When it comes to venture capital investments, the decision-making process is crucial. In order to evaluate the viability of a potential deal, venture capital firms rely on a roadmap for the due diligence process which ensures that the entire team is aligned with the company’s key points and potential areas of concern.
Due Diligence comes into play when a venture capital firm takes a closer look at a company after considering the pitch and involves obtaining a concise overview of the company and identifying any crucial aspects that have not been addressed to ensure that everyone is up to speed and fully aware of the company’s details before making a decision.
While the weightage given may vary across firms, there are several common criteria that are typically investigated. Let’s take a closer look at these components:
- Company Overview: A brief and concise description of the startup, including the product or service provided to customers covering the motivations behind the founders’ endeavor, the beneficiaries of the product or service, and the specific problem the team aims to solve.
- People: An examination of the core team, their combined years of experience, and relevant expertise across different industries. Additionally noting key advisors involved and highlights whether additional expertise is required to build administrative and financial capabilities. Furthermore, any identified product development and sales channel partners critical to the future success of the company are outlined.
- Business Model: The pricing, revenue sources, and overall business strategy of the startup. It also delves into the customer base and traction channels employed to generate revenue.
- Market Opportunity: An analysis of the total addressable market, served available market, and the target market along with the most likely buyers highlighting the current focus of the team’s efforts and identifying potential future markets for expansion.
- Competition: An examination of the competitive landscape, including existing players and potential newcomers. Also evaluating how the team competes with others, any relationships or technologies leveraged for a competitive advantage, barriers to entry, and factors that could deter rivals.
- Deal Terms: The specific details of the investment, such as the amount being raised, the intended use of funds, the runway and working capital, and the impact of monthly cash burn with a new round. Additionally, the ownership record in the Capitalization Table (Cap Table) is provided.
- Key Strengths/Positives: Exploring the notable strengths of the startup, including a sizable market, exceptional customer experience and service, a robust business model, control over the supply chain compared to competitors, optimal timing, strategic partnerships, strong executive management, etc.
- Key Risks/Negatives: Evaluation of potential risks and negatives associated with the venture, such as competing against more mature and well-funded startups, low barriers to entry, uncertainty regarding what drives success, the challenge of maintaining quality at scale, and the role of brand loyalty in overcoming barriers to entry.
- Financials: A 1-5 year financial forecast, traction and growth over time, and other relevant financial metrics that provide insight into the startup’s financial health and prospects.
- Reviews and Exit Scenarios: Including the references by industry experts, such as technology experts, customers, and peers, while exploring likely outcomes for return on investment (ROI) and potential exit scenarios.
By conducting thorough due diligence on themselves, startups can gain valuable insights, identify areas for improvement, and increase their chances of securing investment from the right investors for achieving long-term success.
The more validation you get on your startup from big or small investors in the early stages the less diligence later-stage investors do on your market and business model, so by the time you get to Series-A or beyond, the only diligence left to do is on Deal Terms and Financials.