My learnings in due diligence: 2020 & 2021

My learnings in due diligence: 2020 & 2021

My approach is based on my little experience in angel investment. I read more than 20 angel playbooks, reviewed 500+ companies and interviewed 150 founders during 2020 & 2021. I did 27 due diligence reports, 10 investments and lead 3 syndicates. In the beginning, I started to collect my thoughts in this list. I am changing and adding thoughts from time to time, and would love to learn from you in order to cover all possible screening aspects

At the seed stage, judgment is much more about people judgment, product potential and market potential than ability to size up cashflows, customer acquisition costs or virality metrics—because you don’t have much data.

Pick an industries in which you can play long-term games with long-term people (remember about high intelligence, high energy, and high integrity). Naval Ravikant suggests to find the best scientists in the market and invest in them. They can help with research, and weighted opinion.

If you invest in people who aren’t of the same intellectual caliber as you, then you’re essentially investing down, talking down and thinking down. You’re picking the wrong people. Sad but true story.

Question yourself in the following order:

  1. Founders: high intelligence, high energy, and high integrity?
  2. Founders: what about ego, respect, truths, tones, ethics?
  3. Founders (AGAIN!): founding partnership dynamics.
  4. Founders (AGAIN!!): passion. Do they have conviction? Do they have the humility to go through it again, starting from scratch? Are they resourceful?
  5. How qualified is their talent network? Can they attract pros is their niche?
  6. Have they punched through all the possible failure modes? How they assess the risk?
  7. How do they manage hypergrowth when it happens?
  8. Due diligence. Priority list for revision: pitch deck, people, cap table, terms, business model bottlenecks, market and competitors, financial model (+ show me real numbers from bank account / Amplitude / ...), technology.
  9. Any research papers on the topic? Start from here.
  10. Buy all similar products and try them. Time consuming, but shows market standards and random bullshit.
  11. Compare the products and check all available insights and metrics: visitors, downloads, articles & USPs, followers, LinkedIn management profiles & past experience, clients and partners.
  12. Do your customer development: book 3-5 interviews with existing / potential clients via LinkedIn and have a 15 minutes call to evaluate a need.
  13. Write down what you like and dislike about the deal and track your judgements over time.
  14. You have your own measure and classifier. Why is this company ranked higher than the other on your list? Maybe this is tied to previous personal experience, feelings, guilt, the norm in your society? Consider if there is an emotional attachment to a decision.
  15. Stop reflection. Check cognitive biases list. Most probably you are in a trap:
  16. What was the initial motivation? What is it now?
  17. Are you still ready to spend 2-5 hours per month with this startup?
  18. What are the execution risks that remain?
  19. Are good investors piling in the round with you? Are they ready to follow up in the next round? If not, justify.
  20. Put your thoughts aside for 3 days. Come back. Still interested or caught up in new thoughts? Go back to the top of the list. Do it one more time.
  21. Try to get preferred stock with a simple rule - “I’m buying preferred stock, but after two years it converts to common stock.”
  22. Try to get pro-rata rights.