Concept Stage Startups: Investor Due Diligence List

Concept Funding

Concept stage startups are usually funded by entrepreneurs, family, friends and individual angels. An opportunity has presented itself to you, an idea for a scalable business you see clearly in your mind. How much is your idea worth?  It all depends on what you do with it.

An idea without execution remains an idea; and it has the same value that other ideas that are not acted upon have, none ($0).  For the idea to have value one must decide to move forward with action; one must decide to expend effort to analyze, assess and address or accept the risks that come with the pursuit of the opportunity.  One must decide to execute, to move the idea forward, from concept to market.  Only then, when it’s more than an idea, will there be the possibility that value may be created.

To move the idea forward will require resources.  These resources begin with a personal commitment, potential commitments from others and typically, funding.  Concept stage startups are usually funded by entrepreneurs, family, friends and individual angels.  By providing a comprehensive funding package to potential investors, the entrepreneur significantly increases the probability of obtaining funding.  By addressing the issues required in the funding package, the entrepreneur also addresses risks and unknowns, simultaneously increasing the potential value of the opportunity.  Following is a list of items experienced entrepreneurs include and potential investors will likely request, as part of their consideration for investment in a concept stage project:

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Description of Product / Service Under Consideration

The description of the product or service begins with the problem the product or service resolves.  What is the “pain” the customer is experiencing that would result in their interest in procuring the product or service?  In other words, will it bring value to the customer?  If it can be developed in such a way that it is able to bring value to the customer and simultaneously add value to the company, it may have potential.  Once we have described the problem we need to describe the product or service and how it resolves the customer’s “pain”.   This discussion should include a summary of the product or service’s scalability.

Summary of Customer Discussions / Interviews

Confirming the problem the product or service is resolving, the customer “pain” described above, requires interface with the customer.  Such interface enables the entrepreneur to fully understand the issues that cause the pain; the issues that create a need in the mind of the customer.  Additionally, during these discussions with the customer, the entrepreneur has the opportunity to obtain a crisp understanding, from the customer, which attributes the product or service requires to be successful from the customer’s perspective. The entrepreneur’s ability to articulate the problem and the solution brought by their product or service from the standpoint of the customer will establish credibility with the investor.

Potential / Estimated Market Size

A critical item of interest related to concept stage startups that the potential investors will focus on is the market size.  How large is it, and is it scalable?  However, as important as these factors are, how you arrived at the estimate is of equal importance.  Is it a top down estimate or an estimate built up from the bottom based on an established list of assumptions that have been vetted and validated by the management team? It is suggested that it be a bottom up estimate and that the assumptions be listed such that the potential investor fully understands the source. Should they have been fully vetted, the detail can only help the entrepreneur’s case for funding from the potential investor.

Estimated Cost of Developing the Product / Service

In addition to the description of the product or service the entrepreneurs develop for their concept stage startups, the potential investor will want to understand the estimated cost that will be required to develop the technology the product or service is based upon.  The stronger the estimate, the more confidence the entrepreneur will instill in the potential investor.  While high level development estimates may generally be satisfactory at this early point in the stage of development, should they be utilized, strong contingencies should be included for unknowns,  In addition, ample padding should be added to the timeline as efforts almost always take significantly longer than expected.

Estimated Cost to Deliver Product / Service to Customer

The estimated cost to deliver the product or service to the customer includes a component estimate for the total customer “Cost to Serve”.  It includes each component in the supply chain.  A manufactured product example would include fully allocated manufacturing cost beginning with labor and raw materials cost, conversion cost, sales cost, distribution and delivery cost, administrative, overhead and carrying costs.  Understanding these costs at the component level demonstrates an attention to detail which will create credibility with the potential investor.

 Critical Skills Required to Develop Technology Supporting Product / Service

Special skills may be required to develop the product or service to be developed by our concept stage startups.  Conducting a survey and developing a comprehensive list of the potential skills required, the skills available from the existing players within the conceptual organization and identifying sources of the skills gaps is an important steps to build the confidence of the potential investor.  Entrepreneurs who have conducted such a survey and documented the results, endeavoring to anticipate and address the skills gaps and related costs to acquire such skills will have taken a significant step forward in both their planning but the related execution.

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Risks Related to Opportunity Under Consideration

Startups are, by their nature, highly risky.  There are numerous and varied risks that may be encountered by concept stage startups, and at the other stages as well.  The more the entrepreneur is able to address and mitigate the perceived risks to the investor, the more likely it will be that they will be able to obtain funding.  Additionally, it is possible their funding valuation will be higher.  For the types of risk the startup may face see the following article, “14 Startup Risks Entrepreneurs Should Consider Addressing as they Launch their Startup”.  While no startup, regardless of  stage, or business can eliminate risk, entrepreneurs who identify the potential risks and attempt to mitigate the more significant of them create credibility with investors. This credibility demonstrates a potential to execute.

Business Model Overview and Potential Channels to Market

The startup’s business model depicts the philosophical framework as to how it will create, deliver and capture value for its stakeholders, including its customers, its team and its investors. The business model is critical to the potential investor in that it outlines the entrepreneur’s plan of execution for creating value, in the terms of return for the potential investor.  To create value, the business model must be primed with customers through defined market channels.  In simple terms, market channels are focused paths through which customers will be identified, obtained and routed through the business model.

Executive Summary Describing Opportunity

A core staple in every entrepreneur’s briefcase is the “Executive Summary”.   It typically serves to provide the initial exposure the startup has to a potential investor.  The objective of the “Executive Summary” is to sell the opportunity to the potential investor such that he desires to learn more about the it.  As such it is a marketing tool!   At a high level, the “Executive Summary” describes the problem experienced by potential customers, the solution the company has developed, the opportunity for value creation,  the business model, execution team, the commitment to the investors and “The Ask” or amount of funding needed.  An excellent, detailed discussion of “Executive Summaries” is provided in Guy Kawasaki’s article,  “The Art of the Executive Summary”.   Utilized for concept stage startups, seed stage, early, growth and mezzanine stages, it is important that the “Executive Summary” be kept fresh and up to date.

Pitch Deck Summarizing Opportunity

Another core staple in every entrepreneur’s briefcase is the “Pitch Deck”.  It’s purpose is to assist the entrepreneur in their pitch of the opportunity to investors for funding.  The deck itself should be limited to 10 slides, plus or minus, to be utilized in a 20 minute presentation to potential investors.  For details on creating a strong “Pitch Deck” see Guy Kawasaki’s “The Only 10 Slides You Need in a Pitch” .  Entrepreneurs will not only utilize the “Pitch Deck” for their concept stage startups, but will do so throughout their entrepreneurial journey, regardless of the startup’s stage of development.  As a result, it is important that the deck be continually updated with the latest information about the opportunity.

Bios / Resumes’ of Key Players

One of the key factors affecting a potential investor’s decision as to if they will invest in a given opportunity is the depth and diversity of the management team and their belief as to the team’s ability to execute.  Provision of the bios and resumes of the key players, including, in addition to management, any board, advisory board and professional partners who are participating in the opportunity, is important.  The resumes should be careful to highlight the accomplishments of the players such that it demonstrates, to the potential investor, their experience and potential to execute.

References / Contact Information of Key Players

Potential investors will desire to check the references of the key players.  As a result, the entrepreneur would be wise to plan to provide contact information for each significant player.  Additionally, the contact information for each professional partner is important.  Included in the contact information packet would be a reference to their relationship with the company, if any.  Contact information, including, at a minimum the reference’s email address and phone number, and a little about their background would be appropriate.   During discussions with references the potential investor is likely to have multiple objectives including validation of statements shared by the entrepreneur, obtaining the references opinion of the entrepreneur and their ability to execute, and the quality of the actual reference.

It should be noted that as the concept stage startups develop into seed and early stage startups, the startup learns and adjusts.  As noted above, certain items such as the executive summary and pitch deck must be continually updated.  As the organization learns and adjusts to environmental conditions and market realities, as it moves through these stages of development, the management  team will want to review and revise all of the assumptions and conclusions contained in the documents above.

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Tony Lettich

Tony Lettich has previous corporate venture capital experience and currently serves as Managing Director of The Angel Roundtable. He is a co-founder of FundingSage, which provides valuable information, tools and resources to entrepreneurs seeking to start, grow and fund a business.