Venture Capital Due Diligence

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Venture Capital Due Diligence

  1. 1. Venture Capital Due Diligence Robert Carroll Oasis500
  2. 2. A Great Resource Venture Capital Due Diligence: A Guide to Making Smart Investment Choices and Increasing Your Portfolio Returns By Justin J. Camp, 2002 6/24/2014 Oasis500 2
  3. 3. 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. 6/24/2014 Oasis500 3
  4. 4. Three Stages of Due Diligence • Stage 1: Screening Due Diligence • Stage 2: Business Due Diligence • Stage 3: Legal Due Diligence 6/24/2014 Oasis500 4
  5. 5. STAGE 1: SCREENING Three Stages of Due Diligence 6/24/2014 Oasis500 5
  6. 6. 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 6/24/2014 Oasis500 6
  7. 7. STAGE 2: BUSINESS Three Stages of Due Diligence 6/24/2014 Oasis500 7
  8. 8. 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 6/24/2014 Oasis500 8 Criteria Used by Venture Capitalists to Evaluate New Venture Proposals by Ian C. MacMillan, Robin Siegel, and P.N. Subba Narasimha
  9. 9. 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 streams 6/24/2014 Oasis500 9 Business Model Generation by Alexander Osterwalder and Yves Pigneur
  10. 10. 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? 6/24/2014 Oasis500 10 Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz
  11. 11. The Angle • What insight has the founding team made that the market hasn’t yet realized? 6/24/2014 Oasis500 11 Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz
  12. 12. 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? 6/24/2014 Oasis500 12 Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz
  13. 13. Team References • Look up people on LinkedIn who know the founders 6/24/2014 Oasis500 13
  14. 14. Industry References • Call a few people who know the industry well 6/24/2014 Oasis500 14
  15. 15. Customers/Users • How many users/customers do they have? • How does that compare to other startups that operate in the same/similar space? 6/24/2014 Oasis500 15
  16. 16. Product Roadmap • Where is the product/service going? • Does the team have a competitive/ambitious roadmap? 6/24/2014 Oasis500 16
  17. 17. 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? 6/24/2014 Oasis500 17
  18. 18. STAGE 3: LEGAL Three Stages of Due Diligence 6/24/2014 Oasis500 18
  19. 19. 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 6/24/2014 Oasis500 19 Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz

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