How I invest

Out of curiosity, some of the companies I've invested in have (politely) asked for my DD question template. So here it is. This was developed over several years, inevitably from making mistakes and asking lots of other people with far more experience than myself. There are lots of different types of DD, but I've found this works for me.

“Doubt is not a pleasant position, but certainty is absurd.”

— Voltaire

The best advice I read somewhere was to create a series of 'gates' because these help you screen propspective investments without spending too much time.

Gate 1

A company needs to pass all of these if I'm going to spend more time on this opportunity. In no particular order:

  1. Do I understand it?
  2. What problem are they solving?
  3. Is it impactful?
  4. Is it a good idea?
  5. Does it interest or excite me?
  6. Is the timing right?
  7. What is the value proposition?
  8. Do they understand their market?
  9. Does it scale? Can they scale? (which aren't the same question)
  10. Who are the founders? Do they have domain expertise and do they have a unique insight into their domain?

From this, I try to form a rough investment hypothesis.

Gate 2

So now its interesting. Let's look a little harder.

  1. What stage of product development are they at?
  2. Is it a great team?
  3. Who is the customer & what do they value?
  4. Peter Drucker’s age-old questions: How do they make money in this business? What is the underlying economic logic that explains how to deliver value to customers at an appropriate cost?
  5. What’s the size of the addressable market?
  6. Why this company and this market?
  7. What is their business model?
  8. What’s their sales forecast?
  9. Do they have any proven market traction?
  10. Have they proven product/market fit?
  11. Do customers love them?
  12. Are there any network effects?
  13. Are they a rocket or a tractor? Or something else.
  14. Is time their friend?
  15. Who are their competitors and why will they win?
  16. What’s their moat? What are the barriers to entry?
  17. Do they have any valuable IP?
  18. How much have the founders personally invested? (Is their ass on the line?)
  19. Can I add any value other than capital?
  20. What's their progress velocity?
  21. How will the funds raised be used?

Gate 3

Attempt to assess risk vs reward and decide if I'm really going to invest here.

  1. Cross-check other investors DD questions.
  2. Do they have a sales & marketing strategy?
  3. Can they execute?
  4. How long is their current runway? How much cash do they have now? What’s their burn rate?
  5. What are their milestones?
  6. What’s the potential return?
  7. What is their biggest single threat?
  8. Can they be overtaken by fast-followers?
  9. How high-risk is it? (What’s the likelihood of failure?)
  10. Estimate likelyhood of investment going to zero?
  11. What entity is being invested in?
  12. What valuation am I investing at?
  13. How much do I propose to invest?
  14. Review their latest financial statements.
  15. Review their balance sheet & cash flow.
  16. Sight evidence of Term Sheets, Patents etc.
  17. What conditions do I attach to any investment?

And that's it.