Risks and Assumptions
In diligencing a startup, it’s important to articulate the risks and the assumptions you have about the startup.
Start by identifying the risks in the deal.
The team, product, market, technology, and competition are key sources of risk.
List out each one and what risks the company faces. Prioritize the most important at the top and list in descending order.
Write out the assumptions you are making about the deal.
I find new information often comes to light through the due diligence process, so it’s important to track what you believe to be true about the deal.
Articulate the investment thesis for how this will become a successful investment and not just a successful company.
Writing out the investment thesis forces you to think it through more carefully.
Seeing it written out gives you a sanity check.
For the investment thesis, estimate the potential size of the company, the probability of success, and the return that can be achieved.
Will this become a billion-dollar company or just a few million dollars?
Are there a handful of competitors in the market or thousands?
Are the buyouts in the space in 9-figure exits, 8-figure exits, or less?
Writing out the risks and assumptions will help you gain a better understanding of the deal.
Thank you for joining us for the Startup Funding Espresso where we help startups and investors connect for funding.
Let’s go startup something today.
Thank you for joining your host Hall T. Martin with the Startup Funding Espresso — your daily shot of startup funding and investing.
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Hall T Martin is the director of Investor Connect, which is a 501(c)(3) nonprofit dedicated to the education of investors for early-stage funding. All opinions expressed by Hall and podcast guests are solely their own opinions and do not reflect the opinion of Investor Connect. This podcast is for informational purposes only and should not be relied upon for the basis of investment decisions.