1. Venture Capital Due Diligence
Robert Carroll
Oasis500

2. A Great Resource
Venture Capital Due
Diligence: A Guide to
Making Smart
Investment Choices and
Increasing Your Portfolio
Returns
By Justin J. Camp, 2002
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3. Why do due diligence?
• VC is a game of risk
• 3 out of 4 startups fail
• Everything is based on assumptions. In due
diligence we make sure our assumptions are
sound.
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4. Three Stages of Due Diligence
• Stage 1: Screening Due Diligence
• Stage 2: Business Due Diligence
• Stage 3: Legal Due Diligence
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5. STAGE 1: SCREENING
Three Stages of Due Diligence
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6. Screening
• Companies get screened out for two reasons
– The opportunity does not fit the fund’s mandate
or criteria
• Business stage (idea stage, early stage, etc.)
• Geographic region
• Size of deal
• Industry sector
– Some funds will only review opportunities that
have come via a referral from a trusted source
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7. STAGE 2: BUSINESS
Three Stages of Due Diligence
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8. Founders and Team
• Personality
– Capable of sustained intense effort
– Able to evaluate and react to risk well
– Articulate in discussing venture
– Attends to detail
– Compatible personality
• Experience
– Thoroughly familiar with market
– Demonstrated past leadership
– Track record relevant to venture
– Referred through trustworthy source
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Criteria Used by Venture Capitalists to Evaluate New Venture Proposals by Ian C. MacMillan, Robin Siegel, and P.N. Subba Narasimha

9. Business Model
• Mentally walk through the business model generation
framework
– Key partners
– Key activities
– Key resources
– Value proposition
– Customer relationship
– Channels
– Customer segments
– Cost structure
– Revenue streams
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Business Model Generation by Alexander Osterwalder and Yves Pigneur

10. Go to Market
• Can the company articulate their value
proposition simply?
• Can the team explain how they will go to
market?
• Do they have a good understanding of the
competition?
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Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz

11. The Angle
• What insight has the founding team made
that the market hasn’t yet realized?
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Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz

12. Market Size
• Do your own research on the market size. Are
their assumptions sound?
• What kinds of moves are the incumbents
making?
• How might a startup disrupt the market?
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Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz

13. Team References
• Look up people on LinkedIn who know the
founders
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14. Industry References
• Call a few people who know the industry well
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15. Customers/Users
• How many users/customers do they have?
• How does that compare to other startups that
operate in the same/similar space?
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16. Product Roadmap
• Where is the product/service going?
• Does the team have a competitive/ambitious
roadmap?
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17. Financing Plan
• Are the assumptions made in the financial
projections sound?
• For seed stage:
– Are they raising a reasonable amount to get
through 3 months?
• For growth stage:
– Are they raising a reasonable amount to get them
through 12-18 months?
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18. STAGE 3: LEGAL
Three Stages of Due Diligence
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19. Legal Diligence
• Have the lawyer look through everything.
• “I’m interested in learning how well formed the
company is, if there are skeletons in the closet
like fired co-founders or large debts or
consultants who are owed shares or pending
lawsuits. I’m also curious to see how a founder
negotiates (though this comes through after the
term sheet has been issued).” – Tomasz Tunguz
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Breaking Down a Typical VC/Startup Diligence Process by Tomasz Tunguz