One of the main challenges I have faced working in venture capital is to find a consistent structured way of analyzing companies. The main goals in this analysis are comprehensiveness of the analysis, ease of replication across sectors and like startups, developing a minimally viable analysis for a first pass that can also serve as the foundation of a deeper analysis as an opportunity warrants. 

Over the past 18 months, I’ve read tens of business books on strategy, business models, and analytical frameworks. And over the weekend, I read one particularly insightful book that put a capstone on my preferred collection of analyses: Business Model Generation. The book is crowdsourced from a collection of over 1,000 authors and provides a flexible framework for brainstorming, analyzing and comparing business models. It’s an invaluable resource to any entrepreneur and VC. 


As Steven Blank pointed out, the business model is the first principle that a business is based on and the framework and methods are the most lucid, approachable and actionable I’ve seen.  As a result, I’ve updated my collection of analysis frameworks for each startup I review to be: 

  1. Business model diagram – my interpretation of the business model of a company in the same framework as the above book
  2. Value chain analysis – to develop an understanding of the market dynamics and in particular margin and competition
  3. Porter’s Five Forces – tends to be combined with the value chain; gives a good understanding of nature of long term competitive dynamics
  4. Competitors and partners overview – helpful to have a landscape of the key players. Why partners you ask? They’re might be company’s next competitors
  5. Market sizing – checkbox to ensure we can make our returns work given the investment contemplated
  6. Unit economics – does the math work at a marginal customer level?
  7. Key skills required by the business to skills possessed by the team – how much investment does the team need to make in hiring to ensure the success of the model they have chosen?

While this collection is constantly evolving, the insights and understanding of the value proposition, customer needs and key elements of the business can be teased out after thinking through these exercises. 


2 thoughts on “How do VCs analyze companies?

  1. I have been developing-by-evangelizing an idea that “Creative Risk” ought to be one of the factors an investor considers. Basically a form of Management Team Risk— ability of the team to take on creative risk as a competitive weapon. Please see minute 27:21 in this video for what I mean (rest of vid is good to though 🙂 http://blogs.rassak.com/everythingcommunicates/2009/12/06/introducing-the-law-of-creativity-the-more-competitive-your-sector-the-more-creative-you-need-to-be/

  2. Thanks for the comment. I watched the portion of the video of creative risk. The example you gave in the video was from a CEO's perspective: fear of being regarded as stupid in the market place for taking a large risk with the company.  From my point of view, the creative risk is encapsulated by the management team risk and execution risk. A VC will bet on a team believing that the team will be able to make the right decisions, evaluating the risks and then execute these ideas successfully. An alternate path is to flip the model and build a diagram of an entrepreneur's brain, where Creative Risk may fit better, because it's the entrepreneur who needs to believe in the decision to take a creative risk to further the business and sell the investor on the idea.  Your talk on creativity reminds me of Seth Godin's new book, Linchpin, where you will be able to find more examples to fill out this post: http://blogs.rassak.com/everythingcommunicates/2009/10/28/please-help-me-with-a-talk-im-putting-together/

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