Below is a systematic way I have collected from multiple references to assess the investment opportunity. Of course if the founders are friends who are trying to get started, I would help them answer those and make the opportunity more solid and appealing to us and prospective investors if it is worthwhile.

This is a dynamic post, so I will be updating it from time to time. Some special updates would include (no promise on the timeframe):

• provide a score to each item and total scoring
• A python code to calculate those scores and provide comparisons against proxy companies who have exited through M&A or IPO

Please email me if you found this useful or add a comment.

A. Impact to Exit

Impact and Ways to Support

• Impact enabled by the idea and execution

• How I can help beyond money? (Network, opening doors)

Investment Deal

• What is the min/max ticket size/allocation?

• Pro rata rights

• Discount rate on SAFE/CT (10-25%)?

• Valuation CAP? How do founders come up with the valuation?

• Capitalization Table – Review existing investors, classes of stock
• Proposed deal terms – Assess deal terms – What terms should be changed/negotiated (e.g., valuation, employee stock option pool, etc.?)
• SAFE/Convertible Note: Timing for conversion of note to equity?

Due-diligence depth

• Is there a lead investor (usually VC)? Is this a follow on round?

• Communicated and checked opinions of advisory board and previous/other investors.

Exit strategy

• What is the exit strategy for investors? (Likely acquirers and comparables?)

• Is there alignment with the CEO and team on exit goals?

• Is the exit strategy reasonable/realistic?

• What exit multiples can be predicted under representative scenarios?

• Does the CEO know people in the industry? Is he/she a networker who will make the relationships and do the thought-leadership necessary to get a buyer interest?

B. Opportunity Attractiveness

Market size and Go-to-Market

• Market size (Gather market data as needed, Assess market opportunity and product/market fit)

• Market estimates from the company, properly segmented down to a reasonable addressable market segment. Are the estimates realistic and attractive? Are the market share projections reasonable?

• Are there any credible references for published market data and industry reports by segment, industry vertical, and/or geography?

• Interview industry experts as needed. Gather information on industry comparables as appropriate

• What are the remaining risks in market development?

• Go-to-Market plan with key milestones and granular detail on sales approach. Is the Go-to-Market plan reasonable? Review information and meet with marketing and sales team

• Interview customers, partners, prospects as appropriate

• Beyond verifying some demand, do we understand the customers buying priorities? Is this product/service a “Nice to Have” or a “Need to Have”?

• What are the major risks in marketing awareness, customer adoption rates and sales cycle?

Leadership

• Are everyone in leadership team, especially CTO/COO, full time?

• Experience of CEO in technical area and leadership abilities.

• Do the CEO and team have a proven track record?

• How about the other team members? (Skills, track record)
• What key hires are needed to address gaps?

• Do the founders know and acknowledge those gaps and it is part of their priorities?

• Advisory board available and committed?

Business Model and Financial projections

• How the company makes money? Business/Subscription model? Conversion rates? CAC? MRR?comparison with competition. Assess revenue and pricing model

• Assess Financials, cap table, term sheet

• Does the balance sheet make sense, and are there any showstopper issues?

• Are the financial projections reasonable and conservative in light of past performance? Model of projected financials with sensitivity analyses on key assumptions. Is the sales pipeline adequate, and are key metrics for adoption rate, conversion rates, etc. conservative?

• What are the implications of variances in key assumptions?

• Fundraising history: Founders have fundraised before ? Assess future financing needs- Is the future financing risk manageable?

• Use of funds – past and projected

• Are the assumptions about scaling expense (e.g. G&A, etc.) reasonable, or is the model unrealistic?

• What are remaining financial risks?

Company structure

• Documents of incorporation – Confirm legal entity (C Corp, state of incorporation)

• Are there any showstopper issues (pre-existing agreements, complex shareholder structure, high vendor payables, loans to management, informal promises or undocumented issuances of stock?)

C. Competitiveness

Competitive Advantage

• List of current and prospective competitors (Gather additional competitive intelligence as needed)

• Is the company well positioned with respect to current and likely future competitors?

• Assess competitive environment, competitor positions, barriers to entry

• Is the founding team well-informed about their market and industry? Do they have a good competitive sense, or are they unaware of key issues

• What are the major risks in marketing awareness, customer adoption rates and sales cycle?

Technology/IP/Roadmap

• How strong are the technology and IP positions?

• Competing technologies and commercialization status. Are their superior technologies on the near term horizon?

• Assess remaining technical risk, IP defensibility, competitive technical position. Conduct additional research and expert interviews as needed

• Assess critical technologies, tool choices, software architecture choices, scalability of solution

• Product roadmap available with key milestones -Is the product roadmap achievable?
• What are the remaining risks related to technology, IP and product roadmap

Regulations, Partnerships and Barriers to Entry

• Is the regulatory strategy well thought through and feasible? What are the regulatory risks?

• Status of dialogue with regulatory authorities and/or consultants, copies of relevant communications

• Are the company’s financial resources sufficient to implement the regulatory plan?

• Interview regulatory experts

• Partner identification and relationship status. Any current marketing, joint venture, distribution agreements
• Is the value-chain well understood and what are barriers to entry?

References

To be updated, but one good reference is here