Raising VC: The Due Diligence Process
The due diligence process centers around the belief that it is more effective to assess granular aspects of a business than a business as a whole.<p>To illustrate this imagine that you are an automotive mechanic. One day a car owner drives up and asks you to appraise the general condition of his car so that he can sell it. While seeing the shiny new paint job and hearing about the make of the vehicle, mileage and performance to date will be helpful, it is simply not enough information for you to guarantee that the car will perform well in the future. In order to make that assessment, you will need to evaluate all of the aspects of the car individually. You will check the breaks, test the engine and look at the tires. And then, if each of the cars key parts and processes seem to be in good shape you can conclude that the car as a whole is likely to perform well going forward. If all the things that make up the car are in excellent condition, you can more reliably conclude that the car as a whole is in excellent condition.<p>This same logic applies to conducting due diligence on companies. Investors that simply look at the type of company, how long it has been around and how it has performed to date will typically not make as reliable judgments about the future viability of the company as an investor who takes a look at all of the individual aspects of a business that are required to create future value. The process of conducting due diligence forces investors to carefully check the competency of the management, test the strength of customer demand and look at future competitive dynamics. If all of the parts of the company are well oiled, then it is safer to conclude that the company is ready to go the distance.<p>More at www.markpeterdavis.com