Understandably, everyone wants to be a part of the next Facebook, Apple or Xero but how can investors be sure they aren’t backing a “dud un”? And how can entrepreneurs convince investors that they are not the next Big Un? The answer lies in proper due diligence by the investor and due diligence preparation by the founder.
At our firm, we look for certain attributes before making an investment – qualities such as the team, size of the market, technology, evidence of traction and numbers. This due diligence should apply for all investors investigating investments, whether they’re private or public companies. Although some listings like Guvera are blocked by the ASX, a successful listing is not an affirmation or validation of the business by an expert.
The questions we ask are as follows:
Who’s on your team? Having A-players with a mix of technical, commercial, and domain expertise is a “non-negotiable”. And if you’re a founder, demonstrating a solid team that has a track record of achievement in other businesses will give investors the confidence they need to part with their cash.
What’s the size of the opportunity? A large size of total addressable market, serviceable addressable market and serviceable obtainable market, alongside general market trends, must be demonstrated to show the viability of a start-up. Even if the idea is brilliant, if the market is small, the upside is severely limited.
Does the technology work? Investors should be on the look-out for a competitive advantage in the technology, often secured by patents or trade secrets, and capable of building a moat around the product over time.
Can’t get no traction? If a business can’t show any evidence of early success and growth, then its viability in the long term isn’t looking too promising. Founders should heed this advice and highlight their early wins.
Do the numbers work? Investors should interrogate and stress test the financials of a business looking at historical revenue and costs, the growth strategy and how it will use new funds to meet these business goals. This means founders need to know their numbers and present a financial model that allows for sensitivity analysis.
But what’s the single most important aspect of due diligence that investors can do?
Dig deep. Investors need to put in the time to validate the information presented by founders before they invest their cash. Ring customers who have purportedly used the product or service and ask for their feedback, dig deep into the past of the team and uncover any skeletons, and look closely at the marketplace for both listed and non-listed competitors. There is simply no substitute for thorough due diligence when investing in any business.
Benjamin Chong is a partner at venture capital firm Right Click Capital, investors in high-growth technology businesses.