Potential VC Investor Due Diligence and Questions
Below you will find a list of our due diligence and questions by category for my book Navigate to the Lighthouse:
Value Proposition: Key questions
- What are the biggest pain points experienced and what value propositions are implied?
- By ecosystem stakeholders, e.g. merchants, consumers, card networks, banks, etc.
- What pain points solved and value proposition(s) provided for each stakeholder in your complex ecosystem [per Slide 4], e.g. merchants, consumers, payment processors, merchant-relationship banks, card networks, issuing banks, etc.?
- What are the biggest whys for each stakeholder driving consideration and usage?
- For example, what are US merchant advantages for adopting mobile wallets?
- How different are value propositions and use cases by geographical markets, e.g. US vs. Asia, or specific Asian countries?
- How variable, ad hoc are value propositions and use cases by stakeholder?
- In what way do these value propositions compare to the baseline, status quo – i.e. do nothing – for each stakeholder?
- How much does the value proposition vary by the ecosystem already in place for a merchant or consumer or other stakeholders?
- For example, if your system/company were the incumbent, what would the value proposition be for merchants and consumers?
Market Opportunity & Trends
- What is the addressable market size today vs. the future mapped to your revenue model?
- What is the market size by key segments and note which are addressable today with the current business model, technology platform, vs. future opportunity?
- By ecosystem stakeholder – card networks, merchants, consumers, and scaled further by your existing ecosystem partnerships/relationships?
- As for geographical region or country, if relevant?
- By use case, e.g. money flow type, and related pain point/value proposition?
- The global wallet market is exploding in geographies where credit card penetration/consumer banking penetration is low. How and for whom are you addressing this market?
- For example, serving only a segment of the market that is a) Chinese consumers and b) US merchants today and what approximate % of overall market this represents?
- What factors limit your servable market vs. addressable market today? How does your business plan / technology platform roadmap address this?
- Chinese consumers are traveling the world, especially Europe, have you expanded there? What’s holding you back? How much of the new investment will go there?
- When it comes to growth, you need to be in the flow of money either in purchases or remittances. Right now we don’t see you in a large money flow.
- Take for example US remittances abroad to other countries (but this market is very competitive World Remit and Remitly are 2) getting a large deal with Apple or someone who can grow you. Adyen is working with Apple
- In the US and other specific regions, why do consumers prefer your method?
- I think there is a great opportunity to go abroad and make purchases in Japan, China and so on. Have you sized this opportunity and how you could facilitate/address cross-border merchant acquisition and payments?
- Examples: Olympics, concerts, conferences.
Competitive Landscape & Differentiation
- Who are your key current competitors? Who are current and likely future competitors, large companies or new startups? Homegrown? Name any key VC-backed startups?
- Given the crowded and varied landscape of payments and options, how do you differentiate yourself and why are you the right choice vs. competitors?
- How do you position yourself vs. these key named competitors and challenges with each?
- What is your win rate? By competitor? Are you seeing any changes?
- Why do you win and lose? Does it vary by type of competitor, e.g. large or legacy player vs. startups vs. “do nothing” or homegrown alternatives? Are you seeing any changes?
- How many of your deals are competitive vs. no competition? Is it evolving over time?
- Looking at the gap between current market size and your smaller, current revenue level today, who then captures most of this market opportunity by revenues today?
- Why can you win vs. Apple and Google Pay and do they dominate the market already?
- Why are the card networks not going to do this themselves perhaps in conjunction with select large banks?
- What is your clear and sustainable competitive advantage or set of advantages?
- How much differentiation do you have today by business model, technology integrations, IP/software, technology platform, merchant reach, consumer reach, ecosystem stakeholder partnerships, first mover advantage, etc.? How do you expect that to evolve over time and what are you doing to address any future challenges to maintain this?
Monetization & Business Model
- What is your primary value capture strategy, i.e. primary monetization model?
- Why did you go with this model vs. alternatives, e.g. transactional or services, SaaS, software types of models considered or used by any direct competitors?
- Looking back, has this monetization model changed and if so how? Looking forward do you expect it to evolve and why?
- Describe your primary pricing model and any key drivers of cost to serve and scaling within accounts, as relevant. How does it vary by geography, merchants, others?
- What is your opportunity to grow within each type of merchant or other ‘customer’ account? Is that a part of the business model?
- What secondary monetization models do you have today or planning for future and why?
- Do you have any consulting or other professional services monetization models/strategies today? Do you provide these services for free today as part of sales process? If not, do you plan for future new services monetization models?
Got-to-Market & Channels
- What is your go-to-market strategy and organization?
- Bus Dev vs. marketing vs. quota-carrying sales – FTE/headcount/contractors etc.
- What kind of background does typical BD or sales hire have?
- What is sales hire failure rate and how long to fail?
- Future plans for scaling?
- Describe the typical direct sales process, including typical events/phases/stage gates. length of time, and number of sales touchpoints and interactions needed to go from qualification to close?
- How much of your sales are direct vs. indirect (i.e. partnership and channel sales) and why? In what way has this changed and how will it change in the future? Lastly, how much geographical uniqueness and variance is there?
- How do you create and manage your sales pipeline? How closely tied to marketing as a source of qualified leads?
- If not directly linked to marketing for leads, how do you create leads – e.g. high touch outbound/on site meetings vs. other end of spectrum online self-serve?
- Help me understand the deal profile/complexity and plan to solve any challenges
- How repeatable is your sales processes? Does it vary by geography and partnerships?
- How much of your indirect and direct sales opportunities are in the US vs. Asia vs. other regions? How do you expect this to change?
- How many partnership models do you have currently and what is revenue mix? indirect channel economics and structure?
- How repeatable, and standardized are the channel / partnership deal structures?
- Why are you expanding your footprint here and not around the world? It’s difficult to see US needs Asian country wallets or any new payments.
- Historical actuals and financial forecasts
- 3 years of historical actuals since founding in 2017 and 2-3 years of forecasts
- Expect to be asked about P&L, cash burn [both net of revenues and gross cash expenses], implied runway until out of cash, cash balance, capex at a minimum
- Note may ask for Balance Sheet and CFS as well back to founding in 2017 and future forecasts as available
- Note: Given uncertainty, our opinion would be to push back as reasonable given current uncertainty
- Growth detail: lay out in logical fashion the sources of future growth – i.e. market segments, key merchants or other partners, key geographies – reasonable underlying assumptions – e.g. wallet share of consumers, key merchants, penetration of consumers by geographies, etc. – for investors
- Key is to be ready for investors to dig into key growth drives and underlying assumptions comfort in reasonableness and plan to achieve
- Gross margin and direct costs: gross margin and cost composition historically and forecast detailed based on cost composition and any direct cost leverage benefits, as well as other scaling, process, etc. improvements as we scale the business expected and whys
- Operating costs: detail, relevance, and rationale by functional area and help investors understand degree to which each grows with revenue as business scales as part of business plan needs
- Cost amounts and rationale should clearly tie to a detailed hiring plan and other cost ramp part of business plan and fundraising ask
- Highlight any operating leverage implied by costs growth < revenue growth
- Highlight any scaling effects and fixed cost leverage of technology platform, make sure these tie to both fundraising ask and product/technology roadmap
- Capex: detail, relevance, and rationale – by need, technology, key sales opportunities – by key segments, e.g. geography, merchant, partner, etc.
- Help investors understand degree to which capex need links to revenue, growth, business plan and fundraising ask
Technology & Offer / Product Roadmaps
- Any IP, software or other barriers to entry, filed or granted patents, etc.
- Basics on your source code:
- Developer years – key is to show there is some barrier to entry, meat here
- Open source vs. proprietary vs. 3rd party for legal liability, security, other risks and concerns – key is to set up to allay any investor concerns
- IaaS providers and locations – key is to show not any impediments to scale, security, operational outages, etc.
- Security and architecture – key is to lay out any comfort to investors you can here
- DevOps, agile philosophy, any operational metrics on this
- Any big technology platform bets or dependencies on 3rd parties – – key is to set up to allay any investor concerns
- Technology operations: uptime, outages, etc. type questions you may expect
- Roadmap for technology platform and any additional development for specific opportunities, market segments, etc.
- Timing and investments with linkage to fundraising ask at high level
- Structure, number of and location of operations by functional area
- FTE, headcount by functional area – e.g. R&D, S&M, G&A/back office
- Rationale and relevant mix for each, e.g. technology platform mostly IT maintenance and integration and architecture but less development…
- Current and future hiring plans
- Link future hiring plans to fundraising ask
- Employee churn rate by functional area
- What is the main problem you want to solve? Is there a customer problem, a merchant problem or a wallet problem? I think this is the main question we have to answer that will allow everything to fall into place.
- From a strategic perspective, I have a hard time understanding if you should focus on alternative payment methods in the US for US merchants or if you should acquire a large footprint of wallets around the world and sell to merchants who need it?
- If you acquire a large amount of wallets then your likely customer is the super app like Uber. Who would be other targets?
- What is your clear and sustainable competitive advantage? Its difficult for me to see where this is? What are you doing that makes it difficult for others to copy? What is your Moat?
- Is there pricing pressure on your fees since you sit in the middle? What’s a long term fee structure you think will happen or you can manage?
- Who are likely buyers of the company and why?Is it geographic expansion, technology, customer relationships, or a defensive move? I need to understand why Visa or MC would buy this? Visa bought Plaid and MC will make a move but what do they want synergistically.
- Have you checked Forrester and Gartner’s research reports? How about 3rd party research? What is the market share or potential market share of the company in terms of payments? You are competing to get a share of the merchant market.
- Can i get a pipeline of all alternative payments and estimated date of launch.
Financial Overview and Diligence
You are raising $20M it is unclear how you will use this. This is growth capital so we need to see that $1 investment yields 3-5x return.Use the information below to build a financial model.
- Detailed use of proceeds.
- Detailed margin analysis per wallet
- Projections for next 12 months by month and following 3 years by quarter.
- Details of all capital expenditures and the potential growth globally
- Specifics/Details of projected capital expenditures for the current and the following year
- Details of major financial statement items and components (such as pre-operating expenses, deferred expenses and goodwill).
- Detailed breakdown of all accounts receivable; description of accounting policies concerning credit and credit reviews, aging report for receivables; and details concerning any provisioning for doubtful accounts
- Description of any audit adjustments and internal control memoranda issued by the entity’s auditors for the most recently completed audit; and all reports issued by the auditors (including internal control reports, memoranda one examination, and others)
- Are you good at projecting? Analysis of the budget as compared with the actual results of the most recently completed yearMost current cash flow projections.
- Information concerning all pending tax audits and investigations; and copies of all tax returns for all open years
- Details of foreign currency exposure under loan and other commitments and obligations, details of methods adopted for translation of foreign currency transactions and liabilities; description of hedging and other arrangements to minimize foreign exchange risks
This list is a list of due diligence and questions for your merger strategy.
Want to see the information in a different way? Check the Due Diligence Questions / Checklist on a Google document.