Then & Now: No Nonsense Due Diligence

Source: giphy


A few years ago we wrote about due diligence (DD) in the spirit of better communication to entrepreneurs who pitch us at M25, LPs that invest in us, and co-investors who trust us when joining a round alongside us. Though our goal remains the same, our process has evolved from our learnings.

  • Due diligence should be relative to the size, scale and history of the company.
  • We have to meet founders in person before investing — no exceptions.
  • Our diligence is generally completed in a month or much less.

Here’s what we believe

  1. Our DD isn’t elongating a decision process, but simply confirming (or overturning) the factors behind a decision that was already made. M25 will not offer a term sheet unless we have strong conviction in the potential of the team and business.
  2. Founders should not have to jump through hoops — they are entitled to a transparent, straightforward due diligence process.
  3. LPs deserve high quality due diligence that underscores their GPs’ value as responsible managers of their capital.

Here’s how we do it

Truly, every deal is unique, but we typically follow this process from a timing perspective.

Figure 1: Due Diligence Timeline

Internal Analysis

As the name implies, internal analysis is primarily conducted by our team. We often utilize our extensive network of co-investors, industry experts, and founders to enable comprehensive diligence across industry verticals.

  • We conduct bottom up market sizing internally, using data from sites like Statista, The Bureau of Economic Analysis, and Gartner, to name a few.
  • We look for big markets ideally with a SAM of $5B+. We dig in to understand the current vs. future market opportunity and provide our feedback to founders.
  • Market growth is an important part of our analysis. Of course, we want to see growing segments with the potential for this startup to define a category.
  • We establish a position on market sentiment, identify comparables, and define and score the factors we believe are most important to win, amidst the competitive landscape.
  • It’s also important to understand how fragmented the space is and the amount of funding in the market, which can sometimes act as a competitive advantage.
  • When a product exists, however early, we go through a demo. While we like to understand the tech stack, current state of the product, and the makeup of the team, our focus is understanding three dimensions: outcome-orientation, repeatability of the software, and to what degree the team embraces product best practices.
  • We dig into the North Star Metric / KPI, data intake & the decision-making process, user / buyer personas, and the roadmap too.
  • In particular, we gain a full understanding of the current-state product prioritization process, what the priorities are following the capital infusion, and go to market plans.
  • Finally, we gauge the need for the product and how much it has PMF or early signs of strong demand.
  • What does revenue retention look like?
  • How is revenue recorded?
  • What are the unit economics?
  • What does the pipeline look like?
  • What do you believe your CAC will be? Why?
  • What does your payback period look like? How?
  • What sort of LTV will create a viable business? Why?
  • What gets you to a 4x CAC to LTV ratio? How?
  • Can you spend on growth to support your revenue targets?

External Analysis

We conduct external analysis by talking to customers, learning more from people who know the founders professionally, and bringing in our legal counsel to take us from term sheet to final close.

  • We like to speak with a couple customers to get a sense of how they like the product and to understand their relationship with the founders.
  • If the team sells to a couple different buyer personas, we talk to both — think both sides of a marketplace or SMBs vs. Fortune 500s.
  • The structure of these calls is highly dependent on the business model and industry. For example, customer success’ effectiveness can be highly relevant to a B2B SaaS business but not a marketplace business.
  • We typically talk to two or three references, depending on the number of founders.
  • This person can be an old boss, advisor, co-worker, or someone who has known the founder professionally for a couple years.
  • We look to learn about their relationship, the founder’s strengths, and potential areas for future growth.
  • We don’t require a meeting at the founder’s office but absolutely make it a point to have the founders meet most or all of the M25 team, creating a strong relationship from the start!
  • The legal review is the last piece of our process. We look at everything from the articles of organization, investment documents, cap tables and any special documents like IP agreements, employee agreements, etc.

About the Authors

Victor Gutwein



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VC focused on Midwest early-stage #startups. Objective and analytical investment process combined with a risk-mitigating portfolio theory.