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Hey everyone, I hope you all enjoyed my last two pieces, the “Top 5 Startups to Watch from CES 2014” and “How to be an Authority and Influencer.”
On the agenda today, we have “How to perform effective startup due diligence.” So without further adieu, let’s take a look at how to truly assess startups.
So you’re at the bar one day grabbing drinks with your friends, probably a few shots of tequila since it’s a Friday night after a long week of work. And as the night goes on, one of your friends starts muttering how he hates corporate life and how he’s looking for something new. Something to truly make his own and off he goes inspiring you with his juicy conversational cocktail of this startup he’s working on, the problem he’s aiming to solve, the numbers behind it, and how he’s going to make a billion dollars; doing it! You both are obviously tipsy from the night’s shenanigans do you plan to meet him up for coffee the morning after to discuss further.
And since you’re an angel and invest in a few deals throughout the year, you’re probably excited and curious to hear more. But you’re probably thinking: Where do I start? Let’s start on the ground floor.
I know many of you have thought about investing in startups, joining startups, or wondering if the startups got the potential to truly scale and grow. This is a basic guide to navigating the waters of assessing the startup by doing due diligence.
What is Due Diligence?
What it entails:
Due Diligence Fundamentals
I’ll go into more detail in regards to this in a separate blog post.
Things to Get Before You Get on an Interview Call
Asking the 5 Trap Questions
These are the questions that are at the core of an Early Stage startup. Founders answering them in a competent way is more important than the answer itself.
You want to be able to gauge how they think and observe their ability to communicate their plan
Meant to really get all of the details you need from the founder’s vision.
Question #1: Tell Me About Your Team
I’d love to see what other VC’s feel in regards to this topic, and their rationale.
Question #2: What is Your Cap Structure?
If they don’t know what a Cap structure is, or they don’t know how to answer that question. It obviously tells you that they have no idea what they’re getting into.
Question #3: How Do You Plan to Make Money?
Question #4: Who do you consider your biggest competitors?
Question #5: How much money are you looking to raise?
Obviously this is only applicable if it is an investment due diligence.
Like I said earlier, you should be walking into every meeting prepared to say no. Yes, it’s tough, but it’s also something you’re going to get very used to saying.
At the end of the day, the world of the investor is based on people, not technology. Technologies can only come to life based on the ability of the team to execute.
Therefore, take a step back and ask yourselves if you like the guy? Is this someone you’d like to have a drink with? Can you see yourself hanging out with him and playing golf? If you can’t, investing in him probably won’t be a lot of fun. Ultimately, you are investing in the team. Always keep that in mind.
So take the time to hear out your friend from the bar last night, if what he’s saying makes sense and aligns with what we just discussed – perhaps his startup is worth taking a closer look at. But then again, it could be just the alcohol talking from the night before.
If you all have any questions in regards to this, please don’t hesitate to reach out @Rayyanislam1 I’m always here to listen and help.
Thanks again to TK Kuegler and Wasabi Ventures for making this post possible.
Keep hustling my friends.
This article was originally written by Rayyan I. Patwari, who is the Founder of the Industrial Decarbonization Fund at 8090 Partners.
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