Overview
Founders and investors can look at the same business opportunity from a very different angle. Optimistic entrepreneurs see a world of possibilities with unwavering belief that industry growth, market size, and degree of competition are all in their favor, while prudent investors want to verify that all statements and claims made by founders are true and to assure that it is worth gambling their resources with respect to this opportunity. Smart founders looking to finance their ventures must therefore recognize the fact that the sooner they can examine business opportunities from an investor’s perspective, the sooner they can get funded. When investors decide to seriously consider a business opportunity, they normally conduct thorough due diligence whereby they will sort out facts from the founders’ hype, and verify every detail about the business and its industry and competitive environment.
Proper due diligence is critical to negotiating the terms of a business deal between founders seeking investment funding and investors. Depending on the investment size and professionalism of the investors, the information obtained from due diligence ranges from nothing more than a slide deck to a voluminous amount of material that complies with investors’ criteria. Typical criteria involve historical earnings, financial ratios, projected earnings, tangible book value in relation to price, competence of founding team, and type and stage of business (Bing, 1996). Ultimately, due diligence necessitates an in-depth understanding of the start-up spanning from its conceptual stage through its establishment to the potential future of the entity. In the end, the valuation assigned to a start-up reflects the price that investors are willing to pay for it. A proper due diligence cannot guarantee success for investors, but it can assuredly improve the odds—not to pay over-the-odds for their stake, taking unknown risks, and falling into potential pitfalls (Bing, 1996).
What are investors looking for in due diligence? In essence, it is a deliberate process which enables investors to assess how much a start-up is worth on the basis of multiple factors. These factors generally fall into three main categories: market, business, and legal diligence (Rose, 2016). Market diligence refers to an independent, unbiased, critical review of the claims made by the founders regarding the industry and its market and competitors. Business diligence investigates the specifics about business operations, including an integrity check of the founding team, while legal diligence verifies the start-up’s structure, documentation, and history. The scope and depth of due diligence are influenced by the cost, time and resources available, and the level of risks investors will accept. There are no satisfying alternatives to a comprehensive and systematic due diligence because risks multiply when information, data, and documentation regarding a business opportunity are not deliberately verified (Bing, 1996). In this skill, you will find real-world scenarios, videos, data, and more that will help you:
- Understand your industry and competitive environment
- Identify market space for competitive value creation
- Visualize competitor analysis
- Exploit resources for competitive advantage
- Optimize based on your stage in the business life cycle
Further Reading
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