Professional Business Builders | Rohin Sethi Consulting

Due Diligence

Getting Under the Hood.

 

For Venture Capital & Angel Investors

There are four fundamental conceptual flaws an investor could encounter when entrepreneurs pitch for funding:

  1. The complexity of most businesses cannot be boiled down into a 15-slide presentation or a series of 3-hour meetings. Nuances, if overlooked or undiscovered, can spawn avoidable risk for the investor during a deep dive.

  2. Depending on lifecycle stage, a business is continuously adapting to a marketplace, so there is a chance the pitched business model might be irrelevant down the road.

  3. Entrepreneurs tend to highlight milestones and glorify metrics that do not tell the whole story. Inherent bias exists as the entrepreneur has put everything on the line to make their business a success.

  4. The founder’s pitching skills are not indicative of the success of the business or the founder’s leadership or product sales style. No false causal relationships should be assumed and the founder’s future success, upon first pitch, should be evaluated in isolation solely as “pitching skill.”

Using proprietary due diligence frameworks, we seek to, first, corroborate the information communicated from the entrepreneur about the business and then uncover future risks that could limit desired upside for the investor. Although we borrow from the basic, commoditized framework of problem/solution, market size, scaling strategy, management team etc., the big picture can be further validated or invalidated by the smallest details.  

A few examples of the nuances we look into when conducting diligence of start-ups using primary and secondary data sources:

  1. Degree of homogeneity in the perception of the problem the business is seeking to solve

  2. Risk of future paradigm (regulatory to psychological) shifts within the total addressable market

  3. End-users vs. customer profiles

    a. Bureaucratic structures and purchase decision influencers within these profiles

  4. Protecting competitive advantage while scaling

  5. Qualification of early customer traction; strength of the broad market validation signal

  6. Psychological evaluation of management team – hubris, coach-ability and execution track record

For M&A transactions

While lawyers and accountants account for most of the due diligence, negotiation and integration processes in an M&A transaction, there is analysis that should always be undertaken by independent business consultants.  

This includes analysis of:

  • Revenue segmentation and weighting

  • Culture clashes and work atmosphere

  • Incentive programs

  • Workflows and departmental operations

  • Employee organization and compensation

  • Marketing and branding strategies

  • Industry headwinds and tailwinds

  • Market fragmentation and domination strategy

  • Others

For further information about startup due diligence, M&A transaction due diligence, and examples of client diligence reports, please inquire here and check out the “Testimonial” section of the website.