Simply put, due-diligence in venture capitalism is doing enough research and preparation to avoid investing in a startup that is doomed to fail. Stay on the safer side of one of the riskier practices in business with this comprehensive checklist.
九号彩Gather九号彩 as much 九号彩information about a product九号彩 as you can. Find out who owns it, see if there's a prototype or pre-beta release. 九号彩Record九号彩 the 九号彩details九号彩 of the most attractive product in the 九号彩form fields below.九号彩
StartupLi.st provides information about the product as well as links to the founder's Twitter, Facebook, LinkedIn and more.
Angel.co goes a step further, providing onsite bios and information about everyone involved in the project so far, also the number of applicants and other data that gives a good indication of how popular the product is.
OneVest provides information about startups including funding goals and progress, current customers patent status and more.
Kickstarter is a great place to get in on the ground level with new innovations. While firms are using the platform to seed their idea through customer pledges, the founders can be contacted through the site with investment proposals.
According to Neil Patel, angel investor and co-founder of Crazy Egg, Hello Bar and KISSmetrics, "Rapid growth early on is a sure sign of future success".
"Growth — fast growth — is what entrepreneurs crave, investors need, and markets want. Rapid growth is the sign of a great idea in a hot market."
While growth usually refers to revenue, revenue can rely heavily on other indications. Some key growth metrics for early stage companies include:
- 九号彩Customer Acquisition Cost 九号彩- According to KISSmetrics, to calculate CAC cost, divide sales and marketing costs, including overhead expenses in these departments, for a given period by the number of customers picked up during that period.
- 九号彩Customer Retention九号彩 - How many customers have stayed on? Are they active or occasional users?
- 九号彩Customer Churn/Attrition九号彩 - How many customer have stopped paying for the product?
- 九号彩Customer Life Time Value 九号彩- How much do you expect the startup to earn from a single customer?
- 九号彩Viral Coefficient 九号彩- This takes into account social shares, accepted invites and other social media factors to determine the company's buzz.
- 九号彩Revenue九号彩 - What's the total income of the firm?
- 九号彩Activation 九号彩- The conversion rate between prospect to active customer
- 九号彩Referral 九号彩- What percentage of customers choose to refer the company or product to others?
- 九号彩Profit 九号彩- Are they making more than they're spending?
九号彩Market share九号彩 is calculated after market size. For example, if you and 4 other realtors in your local town serve 650 customers and you personally serve 325 of them, your market share is 50%. A lot of data will need to be gathered from the startup you're considering to evaluate this information. It should be compared again other metrics to determine potential size of business and to project future growth.
Where will your money go in the future? Are there upgrades planned? Are there projections for the effect of these upgrades on growth?
Venture capitalists screen hundreds of startups when looking for that one elusive company that shows real potential for growth. According to 1000ventures.com, just 九号彩6 in 1000 startups pass this first stage of screening and move through to the next. Some of these stages rely on you being a good judge of character, while some rely on the hard analysis of facts and figures.
So, the entrepreneur truly loves what he or she is pitching and you can see they a real passion for their idea. The next thing to consider is trust. This covers both intentional deception and potential ineptitude to determine whether or not the entrepreneur is lying to you or maybe doesn't realize they can't meet their goals.
九号彩Are they able to do what they say they can? 九号彩The dissertation Pitching Trustworthiness: Cues for Trust in Early-Stage Investment Decision-Making by Lakshmi Balachandra addresses this exact issue:
"Trust has been defined as a condition where “the willingness of a party to be vulnerable to the actions of another party based on the expectation that the other will perform a particular action important to the trustor, irrespective of the ability to monitor and control that other party”.
Early-stage investors enter such a relationship with an entrepreneur once they decide to invest in the company; investors must determine if the entrepreneur is trustworthy or not before they invest, which requires an interpersonal analysis."
Determining whether you can trust an entrepreneur is an art as much as it is a science. That being said, there are a few things you can look at.
1Projected growth: Do they meet their targets? If the targets were too high, perhaps they are talking above their game.
2Complete and utter honesty: Have they been 100% honest about every little thing they said?
3Are they reliable? Were they late to meetings? Did they remember all the materials for their pitch? These early warning signs can help you to make broader assumptions about a person's character that might pay off in the long-run.
九号彩How do you recognize a great team leader?九号彩
From past experience it should be obvious whether someone has the ability to lead or not. If the startup already has an office you can go and see the leadership in action. This article on Entrepreneur weighs in on the 10 most important qualities for a good team leader.
Some of the most successful firms in history have been led by entrepreneurial leaders, such as Apple, Microsoft, Facebook and Virgin. Forbes cites 'dissatisfaction with the present' as one of the five most important qualities for an entrepreneurial leader, as well as someone who knows how to point out and exploit the firm's unfair advantages.
A solid business plan should align goals with time-frames and be based on comprehensive research along with the data sources for easy reference. Question the founder about the flexibility of the plan. What happens if sales are 10% lower than predicted? What if customer attrition is 30% higher?
While directed at entrepreneurs, you could use this article to find potential holes in a business plan and ask all the right questions. These are the eight things business plans should be able to tell you about:
4Organization and Management
5Marketing and Sales Strategies
6Service and/or Product Line
Find out exactly what kind of remuneration the employees get and decide whether this could be high enough to be a burn risk or low enough to incite workplace dissatisfaction. PayScale is a great place to find out the average salary for employees in all kinds of industries at differing levels of seniority.
Mission statements lay the foundation for the future of any company. While most commonly viewed as being written for public eyes, the mission statement is a company's internal reference point to stick to at all times.
Both employees and founders need to be reminded of why they are working. Whether or not the employees work in the spirit of the company mission is a good indication of whether they share the founder's passion and are in it for the long-haul. Like the entrepreneur, employees too should be enthusiastic, trustworthy and experts in their field.
Although arguably the most important aspect of due-diligence, this can't be evaluated until the product, founder and team have been screened. Without a solid foundation, indications of financial viability will be an illusion at best. By assessing the key elements of the company (steps one - three) you will be able to determine whether it is worth taking on a firm that has a capacity for future growth but not obvious results right away.
According to Entrepreneur, over 九号彩90% of small business failures九号彩 are caused by poor cash flow. Ensure the founder has compensated for:
- Seasonal sales fluctuations
- Emergency expense
- Late payments
- Unexpected growth/shrinkage
- Outgoing bills date vs incoming cash date
If the firm you're screening hasn't got any projections to present you can conduct this part yourself if you have the following information:
- Utility bills
- Phone bills/communication costs
- Legal/insurance/licensing fees
- Advertising & marketing
- Cost of Goods Sold
- Materials and supplies
- Direct Labor Costs
- Customer service
- Direct sales
- Direct marketing
Entrepreneur recommends to always double the estimates for marketing, triple for legal and insurance. Create two forecasts for both an aggressive plan and a conservative one.
Business Model Forecast is an online tool that offers itself as software for startups to create projections. There's nothing stopping you using it to attempt to predict a firm's financial future.
Smart entrepreneurs have an exit strategy for years down the line. In short, build a business to be tremendously profitable, sell it for millions and have enough personal wealth to last a lifetime.
Find out what the exit plan is for any founder you invest in.
Taking stock of the competitors is similar to calculating market share, but takes a more analytical approach. There are services out there that can do the work for you, but the founder should have a pretty good idea what they're up against if they're knowledgeable about their field.
Software firms likely created their product to address customer needs that a similar service could not; they know who they're trying to get customers from.
Be wary about highly competitive markets - going back to the point about market size and share, these are the more risky places to invest without a great deal of prior knowledge. This article on Platformed compares the approaches competing businesses took and who came out on top. There are some valuable lessons to be learned from other people's mistakes.
九号彩Youtube vs Vimeo九号彩
"A great counter-example of a product that didn’t try to copy and paste features form competition and continued to carve its own unique value proposition is Vimeo. In it’s initial days, YouTube’s hosting and bandwidth infrastructure coupled with its flash-based in-browser embeddable player formed a compelling value proposition for content creators. As YouTube gained traction among content creators, the focus of the platform moved from improving video hosting infrastructure (as a value proposition to creators) to improving match-making of videos with consumers (focusing on video search, and a video feed).
Vimeo decided, instead, to focus its platform on the content creators and provide them with superior video infrastructure (HD player, a netter embeddable player for bloggers). This has helped Vimeo steadily gain popularity as a video-hosting infrastructure despite the YouTube’s dominance as a video network." - Source.
There's obviously a big difference between competing against a multinational corporation and against a startup. As part of working out the market share, realizing the competition's reputation is essential to making sense of the data.
Launching almost a year before Instagram, Hipstamatic got everything right from the get-go. It was essentially out-competed by Instagram. It panicked, releasing a slew of unfinished features and products, before admitting defeat shortly after Instagram got the ultimate seal of approval; acquisition from Facebook.
Your prospective investment should take care of providing you with a list of authorized or pending patents. Make sure they match up exactly to the product they plan on putting out.
Is there proper insurance in place for every concievable eventuality? Making sure you check this personally could be the one thing that saves you your entire investment. An uninsured company is certain to go under in times of disaster.
If you've got this far it looks like you're erring on the side of caution. If you're part of an investment group, don't hesitate to have the other members run this checklist on the startup - keep in mind Gawande's above quote from The Checklist Manifesto.
Good luck with the investment!