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Due Diligence

Due Diligence. Your Offensive Line, Your Offensive Weapon. Care and diligence bring luck .  Thomas Fuller. Why Due Diligence is Important. Returns are positively correlated to hours spent on due diligence. What is the right amount of due diligence?. Due Diligence Sweet Spot ~ 40 hours

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Due Diligence

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  1. Due Diligence Your Offensive Line, Your Offensive Weapon

  2. Care and diligence bring luck. Thomas Fuller

  3. Why Due Diligence is Important Returns are positively correlated to hours spent on due diligence

  4. What is the right amount of due diligence? • Due Diligence Sweet Spot ~ 40 hours • Not an exact science and depends on the deal • More doesn’t correlate to higher returns • Diminishing returns after initial threshold met • Need to be intentional and deliberate when you perform due diligence – in other words: Know what you are looking for and where to look for it.

  5. Due Diligence Process

  6. Due DiligencePhase I

  7. Due DiligencePhase II

  8. Due Diligence Product/Service • Features versus benefits • What is the pain being solved? • How does the product/service’s benefits relieve that pain? • Current product/service alternatives? • IP potential?

  9. Micro-Market Analysis • What benefits does the offering provide that other solutions don’t?

  10. Micro-Market Analysis • What customer pain will the offering resolve? • How strong of an incentive do customers have to give you their money? • Evidence? • Will customers purchase at a price that works for the business model?

  11. Micro-Market Analysis • What evidence can you provide to show that your target market has the potential to grow? • Are there other segments that could benefit from a related offering? How do they benefit? • Can you develop capabilities that are transferable from one segment to another?

  12. Micro-Market Analysis • How attractive is the micro-market? • Fit market into one of three buckets: • Attractive • Fairly attractive • Not attractive

  13. Macro-Market Analysis

  14. Macro-Market Analysis • How attractive is the Macro-Market? • Fit market into one of three buckets: • Attractive • Fairly attractive • Not attractive

  15. Industry AnalysisPorter’s Five Forces

  16. Industry AnalysisBlue Ocean or Bloody Ocean “Blue oceans….denote all the industries not in existence today – the unknown market space, untainted by competition. In blue oceans, demand is created rather than fought over. There is ample opportunity for growth that is both profitable and rapid.” Bloody Oceans – industry characteristics where companies fight and primarily compete on price.

  17. Industry Analysis • How attractive is the Industry? • Fit industry into one of three buckets: • Attractive • Fairly attractive • Not attractive

  18. Management TeamExecution Risk • Does the management team have the relevant experience necessary to execute the business plan? • Industry Skills? • Technical Skills? • Transferable Skills? • Passion?

  19. Management Analysis • How attractive is the Management Team? • Fit into one of three buckets: • Attractive • Fairly attractive • Not attractive

  20. Financial Analysis • What is the company’s revenue Model • Are the revenue projections realistic? • Has the founders included the details on ‘how’ they plan on achieving these projections? • Gross, operational and net margins? • Sources and uses of funds? • Projections • Management, downside and upside scenarios? • ROI for investors?

  21. Financial Analysis • How attractive are the financial terms? • Fit into one of three buckets: • Attractive • Fairly attractive • Not attractive

  22. Risk Assessment • Industry Risk • Changes to Porter’s Five Forces • Market (Product/Service) Risk • Changes in customer preference • Financial Risk • Appropriateness of fund sources and uses • Execution Risk • Management team execution ability

  23. Due Diligence Checklist - Attachment

  24. Efficient Due Diligence • How can you work with others to share in due diligence tasks? • Angel groups/forums • Deal flow • Collaboration • Leverage investor specialties/experience • Lead investor strategy • Due diligence delegation based on specialties

  25. Q&A Ryan Goral www.separtners-llc.com Twitter: @ryangoral

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