Performing Due Diligence

If you went up to any Venture Capitalist and asked what the bloodline of a VC firm is, almost all of them will almost immediately respond with “Deal Flow”. Your ability to generate and maintain a pipeline of startups that look promising from an investment perspective is actually what will make or break you as a venture capitalist. While you’re creating this pipeline, there’s another important piece of the puzzle investors need to make a decision on whether to invest: due diligence.

The ability to gather as much data on the startup of interest is a necessary minimum for any VC. What really matters on top of that is identifying the metrics and angles that define startups, along with having an intuition around the key items you can’t measure, like the team or the culture. All of this can only come from experience and from actually being on the front lines and looking for startups worthy of being sourced. During my brief experience of sourcing startups, I’ve been able to refine my due diligence process (both from experience and from reading articles like the ones below). There’s still a lot to learn here and the work is almost never over, but having a framework in place helps me make the most use of not only my time, but the founders’ as well.

Of course, all of this depends on factors such as what stage you’re investing in, the sector, and your investment thesis. For now, my framework is based on Pre-Seed / Seed stage companies with a sector-agnostic approach. Below is how I normally begin the due diligence process once I’ve found a promising startup:

Initial Diligence

After reaching out to the founder and asking to meet to learn more about their company, I usually jot down some notes to get a better understanding of the company’s overview, team background, website, and funding history. This gives me a good sense of the company’s health and standing so that when I meet with the founder, I can immediately take all of that info I’ve looked into and hit the ground running. The last thing I’d want to do is ask the founder questions that could have easily been looked up. Their time is just as valuable and shouldn’t be wasted.

First Founder Meeting

When I first meet with the founder, I try to establish some sort of connection right away. Usually these meetings can be difficult to maneuver in my experience unless you show you can relate to the founder in one way or another. After the nerves die down, I tend to ask questions around things like the origin of the idea for their startup, what the problem is that their solution can solve, funding requirements, and other things around the product and what people currently do that warrants them to use their product or service instead. One key thing I’ve noticed is that if users currently use a spreadsheet to accomplish something, there’s a good chance that there’s a need for software to address it instead. This meeting also helps me gauge what kind of personality the founder has and if I think they’re capable of scaling the startup down the road. Asking about the team is important, as it’s an indicator of a major strength or weakness of the company. At the end, I usually request to see their investor deck and if they have it, they’ll send it over for me to review.

Post-Meet Diligence

After meeting with the founder, I review the pitch deck if they sent it over. This provides a ton of valuable info that lets me see not only the overview of the company, but also the broader overall market, competitors, financing needs, and more. I also take this time to perform further diligence on things like the pros and cons of investing in the company including risk analysis, market trends, competition, and so on. That way, when it comes time to meeting with my Principal and the rest of the team, I’m able to comfortably pitch these startups and explain my thought process behind why we should pass on, postpone, or invest in the company.

At the end, I put together a short deal summary that allows me to gain a simpler but overall view of the company I’ve sourced. This includes things like a description, amount of capital they’re looking for, why we should invest, risks, and what the fund can do to help add value to the company. If the team I pitch to is interested in the company, there will be further due diligence on my end around the market, the business model, and other factors to make it easier to determine whether the startup is a viable candidate for investment.

Having done this for several companies now has allowed me to gain a better appreciation for what it really takes to become an Associate at a VC firm. The amount of work, research, and time put in to identify, source, and weed out potential companies looking for investments has made me more appreciative of all parties involved and what it really takes to succeed in an industry like this. Only through continuous tweaking and improvements in how I perform due diligence on companies will I be able to truly provide value to both firms and companies alike.