How to perform more detailed due diligence
At an early stage, every investor has their own way of performing due diligence depending on what matters most to them. For instance, some investors focus more on the legal side, others, on the team, market size, competitive landscape and/or business model. There is no right way to perform due diligence, and I recommend writing down all the important questions that you would need to know in order to feel comfortable making the investment. For instance, it would be questions like these:
- How many full time people are on the team?
- Is the team’s background relevant to what they are doing now?
- Do I trust the founders? What are their big motivations for starting this business?
- What does the competitive landscape look like?
- Is their market size attractive?
- Who can potentially acquire them?
- Does their business model make sense?
- Do they have early indicators that what they are building/offering is something people want?
- Does the team look like they have what it takes to stay in it for the long run?
- Are the legal terms favorable for investors?
- Does my lawyer approve of the legal terms?
- What type of traction do they have so far?
- Are the use of funds being allocated strategically?
- Who else is investing?
- Sign up for the startups product/service if possible and test it out yourself!
If you are new to startup investing, here are a few more things to think about:
Only invest in what you know. There are myriad variables to consider when investing in startups, which become even more complex when different industries are involved. For this reason, many venture capital firms specialize in a few core industries that they intimately understand. Pick startups that are related to your professional experience or to one of your main hobbies so that the industry is second nature to you, and you can focus on the nuances that may better indicate the potential for success of the business.
Spend time learning about the founders. At early stages, success is less about the product and business than it is about the visionaries behind it and their drive to succeed. Often, experiencing it for yourself is the best way to learn. Keeping in mind your risk factors, consider starting with a small trial investment to familiarize yourself with the process.