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
More than 40
hours = 7.1x
returns
Less than 20
hours = 1.1x
returns
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.
Due Diligence Process
Phase I – High Level
Sniff Test
Phase II – Deep Due
Diligence
• Using Mullins Framework
• Due Diligence Checklist
The Seven Domains of
Attractive Opportunities
Market Domains
Macro
Level
Industry Domains
Market Attractiveness
Industry Attractiveness
Mission,
Aspirations,
Propensity
for Risk
Ability to
Execute
on CSFs
Team
Domains
Micro
Level
Connectedness up
and down Value Chain
Target Segment Benefits
and Attractiveness
© 2006 John W. Mullins
Sustainable Advantage
Due Diligence
Phase I
Management Team
Experience
Target Market Clarity
Produce/Service
Description
IP Potential
Industry Definition
Valuation
Reasonableness, HighLevel Financial
Summary, Exit
Possibilities
High-Level Risk
Assessment
Due Diligence
Phase II
Management Team
Analysis
Product/service
comparison to direct
and indirect
competitive offerings
IP research and
investigation
Details on the target
market and breakdown on the
company’s marketing
plan
Competitive matrix
with positioning
analysis
Valuation comparisons
and detailed financial
analysis, exit scenarios
and target ROI
Detailed risk
assessment
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?
Micro-Market Analysis
• What benefits does the offering provide
that other solutions don’t?
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?
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?
Micro-Market Analysis
• How attractive is the micro-market?
– Fit market into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
Macro-Market Analysis
How big is the market?
• Secondary research
• Number of potential customers
How fast has the market
grown historically?
• One year growth?
• Two year growth?
• Five year growth?
How fast will the market
grow?
• Next 6 months?
• Next 2 years?
• Next 5 years?
What trends will affect
the market?
• Economic, demographic, sociocultural, technological, regulatory
or natural.
Macro-Market Analysis
• How attractive is the Macro-Market?
– Fit market into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
Industry Analysis
Porter’s Five Forces
Industry Analysis
Blue 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.
Industry Analysis
• How attractive is the Industry?
– Fit industry into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
Management Team
Execution Risk
• Does the management team have the relevant
experience necessary to execute the business
plan?
– Industry Skills?
– Technical Skills?
– Transferable Skills?
• Passion?
Management Analysis
• How attractive is the Management Team?
– Fit into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
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?
Financial Analysis
• How attractive are the financial terms?
– Fit into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive
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
Due Diligence Checklist
- Attachment
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
Q&A
Ryan Goral
www.separtners-llc.com
Twitter: @ryangoral