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First meeting

When I’m meeting a startup for the first time, my goal is to understand as much about the business and team as I can.

  • Founders/Team: How do the founders know each other? How do they interact with each other? Are they passionate? How qualified are they? What would it be like to work with them?
  • Business: In some form, I walk through the Business Model Generation framework: value proposition, key activities, key partners, major assets, channels of distribution, customer segments, cost structure and revenue streams.
  • Basics: Can the company simply articulate their value proposition? Can the team explain how they will go to market? Do they have a good understanding of the competition?

After the first meeting

After a startup has left and I’m “doing diligence”, I want to test some of the assertions made by the company.

  • Market Size Validation: The first thing is to verify market size and whether it foots with the data the company presented. Then, I try to dig deeper into the nuances of the market. How concentrated is the market? What kinds of moves are the incumbents making and how they change the market?
  • Pitch-it-myself test: I stop a few partners in the office and give them the pitch to test their reactions. I do the same with my wife. In a sense, I’m getting their cursory opinions and some skewed market feedback, but I’m also testing the pitch, the go-to-market and the top level attractiveness of the company. It helps me think through a lot of the business.
  • Six degrees of separation. I look up the founders on LinkedIn, send a few emails for references and then wait to hear back on some initial thoughts.

Second and third meetings

Follow up meetings are dedicated to metrics and the future.

  • Pipeline: Let’s get to brass tacks and some numbers. How many customers/users? How often are they using it? What are CAQ, LTV and churn metrics? How do those compare with industry benchmarks?
  • Product roadmap: I know it’s early and hard to forecast, but I’m looking to be convinced the founder have a good sense of where the company is going and why.
  • Financing plan: What are your major buckets of expenditures? How do they change over time? Is your revenue plan reasonable? What are the key metrics for the business?
  • Industry: I’ll call a few friends in the industry who can help me better understand the dynamics in the sector.

Additional meetings

At this point, I’m really interested and I’m trying to understand the investment risks better.

  • Key issues analysis: After a founder has met several partners, I gather questions and dig deeper to answer them as best I can. If I don’t have the material to answer the questions, I diligence some more: data, reference calls, and more meetings.

After the term sheet:

After the term sheet is signed, the lawyers step in.

  • Legal diligence:  I’m interested in learning how well formed the company is, if there are skeletons in the closet like fired co-founders or large debts or consultants who are owed shares or pending lawsuits. I’m also curious to see how a founder negotiates (though this comes through after the term sheet has been issued).
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  1. Pingback: Anatomy of a reference check | ex post facto

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