Venture capital can be a daunting asset class to analyze. If you are familiar with private equity, you are probably used to judging a company based on detailed financial modeling. With venture capital deals, the numbers and parameters you have for mature companies just don’t exist yet. That doesn’t mean that you can’t conduct a thorough analysis of a company before investing. What it does mean is that you need to have a formal and disciplined process for due diligence that is tailored specifically to early stage companies and startups.
At Laconia, we like to break our diligence into three stages. During the first stage, we focus on the business’s operations, and perhaps more importantly, the management team’s understanding and thought process around their product and strategy. While we do look at financial models at this point, we are looking at them with a grain of salt. We want to make sure there is a solid sales process in place and a good understanding of how the company is going to prioritize customers and increase their market share. In this stage, we also do our own research into the market size and competitive landscape, and take a detailed look at the company’s capital strategy.
During the second stage, we shift our focus to customers and product development. At this point, besides looking into the product development roadmap, we like to introduce the company we are working with to potential customers from our network. Not only does this allow us to add value to the relationship throughout the due diligence process, but it also allows us to get real time market insight and understanding of the sales process. Product market fit is one of the most important things to consider when evaluating a venture deal.
The final stage of our due diligence process mostly consists of tying up any loose ends. If we get to this point, we already have a good understanding of the product, and we have a technical expert take a look at the details of the tech stack and software architecture to make sure everything is sound. We also conduct reference calls for the main team members and take a look at the company’s legal documents. We try to keep the process as efficient as possible to respect everyone’s time while still being thorough. We strive to keep the due diligence process productive and painless for both ourselves and the entrepreneurs we work with.
If you are looking to make venture capital investments, a thorough due diligence process is essential. Don’t assume that just because a company is nascent in its development that you can’t do the research and ask the questions to make a smart investment decision. We have found that as long as you stay disciplined with a proven process, even this seemingly enigmatic asset class can be analyzed.
If you would like to learn more about our process, or are interested in collaborating with us on due diligence for your own venture investments, feel free to reach out to us at email@example.com.
Originally published in the July 2018 LVAM Newsletter.