How To Do it..

by: Vince Occhipiniti

At Woodside Fund, we believe it shouldn't be a mystery. Understanding due diligence improves the information flow between venture funds and potential entrepreneurs. Better information leads to better investment decisions and better long term partnerships. In my opinion,

Due diligence is:

• A process designed to get a 360 degree view of the business.
• An evaluation of an entrepreneurs' ability to ascertain strength AND weakness.
• An opportunity to validate true customer demand. 
• The beginning foundation of trust and partnership. 

Due diligence is NOT:

• Slow torture in the form of a lengthy checklist.
• A stress test for the executive team.
• A chance to prove we are smarter than you are.
• A justification to 'ding' your valuation.
• A delay tactic until another fund takes interest.

What You Can Expect

All VCs go about their due diligence process in their own way, but there are a few key areas entrepreneurs should always expect.  At Woodside our due diligence process is focuses on three primary areas: market, technology and team.

Market

A good venture fund can do a lot to help a company, but we can't make customers buy products.  Ninety-nine percent of what comes through our doors are "nice-to-have" products presented by entrepreneurs as "must-have."

Customers can't just have a "need" for your product or service.  That "need" must be important enough to them personally to cut through the 100 other priorities currently occupying their day.  What we have learned over 20 years is that customers buy for personal reasons not just for the good of the company. 

Entrepreneurs must challenge their prospects to get to the real truth.  After a customer states they have a need for your product, you might say in a nice way: "I appreciate your enthusiasm for our product but you must have at least 50 other projects right now. How realistic is it that you would even find time to evaluate our product let alone buy?"  If your prospect truly "must-have" your product they will defend their pain.  If they don't stand up to the plate, then 99% of the time it will not yield a real customer.

Below is a sample set of questions Woodside will most likely ask a prospective customer.  We would encourage the entrepreneurs to ask similar questions.

· How long have you been dealing with this problem?
· What have you done to date to address this problem?
· What is the real impact on the organization?
· Can you quantify this?
· What happens if you do not fix this? 
· Of your top 10 priorities, where does this fit?
· How much would they be willing to pay?
· How important is this to you personally?

We validate these answers with dozens of customer calls.  Typically we have multiple partners making the calls to insure no one partner is tempted to advocate or "sell a deal" to the partnership.  We'll talk to the entrepreneur's reference list (undoubtedly well prepped), but more importantly, we speak with prospective customers, technical leaders and industry contacts where we have prior relationships.  No validated pain, no deal.

While this is the foundation of our market assessment, of course every VC assesses the opportunity in terms of projected market size and potential competition.  The presentation with the proverbial bar chart sloping up and to the right does not impress. We are less interested in Gartner and IDC market predictions than a thoughtful bottoms-up, total available market (TAM) analysis based on your target customer.

We often see the obligatory competition slide with the company logo in the upper right hand corner of a standard two-by-two matrix. This is helpful but not sufficient.  You must articulate beyond four quadrants your competitive barrier to entry, your unique differentiators and your future competition.  The kiss of death is for us to find unanticipated competition you neglect to mention.  Know potential entrants cold.