Small Business Funding, How to fund a startup, Due Diligence (I)

Each and every Startup must conduct the Due Diligence phase before meeting VCs  for Venture Funding.  This stage primarily evaluates the viability of the business concept for the investor or an entrepreneur. This largely overlooked, or at the very least underrated task is of utmost importance in the lifecycle of a deal. Before we go investing often-scarce resources on a venture, we must make sure that it can achieve a sustainable competitive advantage in the marketplace. Most entrepreneurs would like to get to market before the competition and so in their haste make a tactical mistake of sacrificing due diligence. It’s that run fast or die mentality again. The reality is that one must not only get to market as expeditiously as possible but also allocate sufficient time to researching the business issues.  Otherwise failure is eminent. That having been said, the process of due diligence, which involves a great deal of probing and the asking of thought provoking questions, comprises of the following nine steps:

1. Concept validation by Subject Matter Experts (SME)

More often than not, would-be entrepreneurs come up with their ideas because they have observed inefficiencies in business operations or are visionaries in their field of expertise, being able to hypothesize the natural evolution of technology and business processes. Simply put, ideas are entrepreneur’s response to finding a solution to a perceived problem.  Whether you are ill or are trying to start a new company, getting a second opinion always helps.  It is an unbiased view on a given situation. That is the essence of concept validation by SME.   One must seek out an independent SME to review the content of the business concept and then have them opine on its viability.  SME’s have the advantage of having deep skills in their area of expertise and can postulate whether the idea can indeed be converted into reality.  Some of the possible outcomes of such validations are:  

  • Excellent idea – can be implemented into a successful business.
  • Current technology is unable to support the idea.
  • Market is already saturated with similar ideas.
  • Idea has been tried before and failed.
  • Great idea but needs improvement.

 Entrepreneurs tend to get obsessed with their pet projects and loose their objectivity.  Hence, a second opinion is needed.  Have true industry experts who know every facet of the game, test the concept out. Has it been tried in the past, and to what end? Will it work? These expert opinions are key. Listen to them.

 2. Market analysis.

Rather self-explanatory: This task involves deep analysis of not only the environment in which we wish to thrive, but also the competition. After all, in times of a recession, it may not be wise to try and sell luxury goods. First, thoroughly define the target market to be served using recent market data and analysts’ estimates of current and projected size and growth rates (again, don’t be afraid to ask for help from those you trust).  Keep in mind exactly what percent of the market the company plans to capture and envision who will buy the product and why, in light of hypothetical or actual competition. Take note of the distribution/selling strategies used in the industry, and carefully choose which one(s) you plan to use to penetrate the market. The Business Plan chapters will further elaborate upon this topic.

 3. Organizational structure.

Ask yourself tough questions about the organization: what do we want to look like? Of course we want the best for our business. Can we do true justice to our idea? But we need to be careful in choosing the most appropriate people for the job, and not necessarily the “best”. So, who do you want in management? What do you want your creative teams to look like? This is where you want to be very self-critical. You must identify your strengths, weaknesses, and needs; then, you must address them realistically. Also, you will want to start giving thought to your board of directors, and whom you would like to see as your CEO (Chief Executive Officer) and CFO (Chief Financial Officer). You may want a couple of insiders whom you trust in order to make sure that your interests are served.  On the other hand, you may also want some powerful industry-types who know others in the industry: people who can provide extremely valuable input and contacts. And don’t forget: additional subject matter experts and legal contacts can be just as valuable!  Above all you will need to define and build an organization that believes in your vision and will do whatever it takes in making it a success.

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One Comment on “Small Business Funding, How to fund a startup, Due Diligence (I)”

  1. […] Small Business Funding, How to fund a startup, Due Diligence (I) […]

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