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
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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.
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4. Three Stages of Due Diligence
⢠Stage 1: Screening Due Diligence
⢠Stage 2: Business Due Diligence
⢠Stage 3: Legal Due Diligence
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6. Screening
⢠Companies get screened out for two reasons
â The opportunity does not fit the fundâs mandate
or criteria
⢠Business stage (idea stage, early stage, etc.)
⢠Geographic region
⢠Size of deal
⢠Industry sector
â Some funds will only review opportunities that
have come via a referral from a trusted source
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8. Founders and Team
⢠Personality
â Capable of sustained intense effort
â Able to evaluate and react to risk well
â Articulate in discussing venture
â Attends to detail
â Compatible personality
⢠Experience
â Thoroughly familiar with market
â Demonstrated past leadership
â Track record relevant to venture
â Referred through trustworthy source
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Criteria Used by Venture Capitalists to Evaluate New Venture Proposals by Ian C. MacMillan, Robin Siegel, and P.N. Subba Narasimha
9. Business Model
⢠Mentally walk through the business model generation
framework
â Key partners
â Key activities
â Key resources
â Value proposition
â Customer relationship
â Channels
â Customer segments
â Cost structure
â Revenue streams
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Business Model Generation by Alexander Osterwalder and Yves Pigneur
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?
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Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz
11. The Angle
⢠What insight has the founding team made
that the market hasnât yet realized?
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Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz
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?
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Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz
15. Customers/Users
⢠How many users/customers do they have?
⢠How does that compare to other startups that
operate in the same/similar space?
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16. Product Roadmap
⢠Where is the product/service going?
⢠Does the team have a competitive/ambitious
roadmap?
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17. Financing Plan
⢠Are the assumptions made in the financial
projections sound?
⢠For seed stage:
â Are they raising a reasonable amount to get
through 3 months?
⢠For growth stage:
â Are they raising a reasonable amount to get them
through 12-18 months?
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19. Legal Diligence
⢠Have the lawyer look through everything.
⢠âIâm 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. Iâm also curious to see how a founder
negotiates (though this comes through after the
term sheet has been issued).â â Tomasz Tunguz
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Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz