Data room & Due diligence
I LOVE IT whenever startups share with me their organised and detailed virtual data room. It certainly helps to speed up the due diligence process. Of course, there are pros and cons of giving prospective investors access to a detailed data room (which I will not be elaborating here but you can easily get the answers on Google). In this article, I would like to share my personal due diligence checklist when assessing the startups.
Note that the questions and importance of the questions will vary according to startups’ development stages, operating industry, type of business (e.g. B2B or B2C), etc. Therefore, some questions are not as relevant or applicable. This list will also improve as I gain more VC experience so I will periodically review and update it ☺
People and Team
- Technical and managerial skills of the management
- Relevance of knowledge and past experience
- Extensiveness of networks (For fundraising, partnerships, acquiring customers, attracting experienced hires, expanding the team, and other resources)
- Ability to execute the strategies in the face of uncertainty and ambiguity (COVID-19 pandemic acted as a natural selection filter to weed out the companies who failed to adapt fast and pivot their businesses well)
- Team size (spilt by functions and geographies) — Now and in the next 1–2 years (Team expansion should be able to support the product development roadmap, geographical expansion, and sales projections)
- Company culture (Difficult to assess but highly critical)
- Market size estimation (TAM, SAM, SOM) — whether the problem has a large addressable market
- How much of the market is the startup capturing today and how much more can the startup realistically capture
- Market attractiveness (Michael Porter’s 5 Forces analysis)
- Regulatory environment—What are the licences and certifications required to operate and what is the current application status
- Who are the major competitors
- Who are the direct and indirect competitors (in terms product offerings, operating geographies, and industries they serve)
- Competitive interaction — Predict how interaction among competing companies will play out; consider behavioural and game theory approaches)
- Product-market fit
- Target segments — take note of the quality and size (B2B: Total contract value, Average revenue per account; B2C: Daily Active Users, Monthly Active users, Average Revenue per Paying User, Time spent on the app)
- Tech stack — proprietary or open source?
Sales and marketing
- Length of sales cycle and deployment period
- Payment milestones
- Customer acquisition strategies — direct, channel partners (for B2B startups), ecosystem partners
- Sales pipeline and the stage of negotiation (for B2B startups)
- Fully-loaded Customer Acquisition Cost (CAC) = Total cost of everything associated with acquisition / Total net new customers
- Customer lifetime value (CLV) to Customer Acquisition Cost analysis
- Churn analysis
- What is driving revenue growth— Revenue from one-time integration fee vs annual recurring revenue (ARR)? Revenue from new accounts vs revenue from revenue growth from existing accounts?
- Concentration risk — how much revenue came from the largest few customers?
- Path to profitability — unit economics of the startup and how will it improve and turn positive?
- Financial statements and key assumptions
- Operational spend and efficiency — Whether OPEX growth can be lesser than revenue growth in a reasonable sustainable manner
- Burn rate – How well the startup is managing the burn; How much burn is required to achieve the revenue numbers
- When is the startup expected to breakeven
- Based on the current CAC and marketing spend is budgeted, how many customers are you expecting to acquire?
- Product development roadmap and geographical expansion
- Which geographies and sectors to target sequentially or concurrently — choose large and fast growing markets where you have a strategic advantage, and where the competitive and market dynamics are in your favour
- Replicability — as not all technologies can be readily deployed across all markets (e.g. language) — what are the associated costs involved?
- Speed is critical to capturing value in this nascent market, as the winner-take-all dynamics of ecosystem-based markets heavily favour first movers or fast followers
- If a founder spins off a new business from a previous startup, the due diligence process should involve checking the legal standing of the new entity as well as the founder’s history or background, and references from their key contacts, which include past backers, mentors and advisors.
- Potential investors of the new business should talk to former investors to address potential risks involving intellectual property (IP) and the capitalisation table.
- Potential investors should require the founder to ask prior investors to sign waivers or have the prior company dissolved before proceeding with the investment.
Forecasts are best estimates. Thorough analysis gives investors a certain level of comfort. Ultimately, the management team’s ability to execute to plan and navigate ambiguity and challenges is the real deal.
What I enjoy the most about my VC work is to meet (and, if lucky enough, work) with charismatic founders who has a heart for the team, community and the entire ecosystem. They are driven by their unshakeable sense of purpose and have the ability to inspire employees, users/clients, and investors to take the risk and join them on the journey. All the best to these changemakers, for the world will become a more exciting place because of their great contributions 🙌🏻