Our diligence process
At Malpani Ventures, for all new investments, we undertake thorough diligence for a period of 4 to 6 weeks before issuing a term sheet. One oft-asked question from founders and investing peers alike is this:
“If you invest so early, why does your diligence take so long?”
This post seeks to address the question!
Yes, we do invest early – usually around the pre-seed & seed stage and yes there is very little in terms of financial data to warrant a thorough audit of the numbers, however, our focus areas of diligence are really answering the following questions, which fall the under the 3 broad buckets:
Market:
What is the ICP of the company for its first 10 to 100 customers
Is the problem/ need being serviced one which has one or more of the following qualities from a customer lens:
Important/ Mission-critical need
Replacing a relatively inefficient or expensive process
Willingness to pay
How large is the TAM for the above ICP? Can it expand?
Product/ Service offered:
Has the company built something unique or is this a better mouse trap?
Who is the company competing with? How is the present need serviced?
Why will the customer stick with the company?
A broad understanding of unit economics and margins
Founder-market fit:
Why are these the best founders to solve this problem – experience, personal motivation, background
Do the founders have an unfair advantage going into this market – expertise, unique insight, network
What do we see in them that makes us want to back them?
To answer these questions, our diligence involves the following:
Market research:
Learning from market participants including customer interviews, discussions with sector experts
Estimation of TAM
Reviewing founder/ company readiness:
Sales funnel
Financial MIS for the previous and next 12 months
Movement of unit economics over time
We consider internal metrics tracked by the founders as a very good leading indicator
Founder background:
Reference calls
Discussions with the existing team
While the above list is not exhaustive, it does give a good sense of the activities undertaken by our team. In our view, a 4 to 6 weeks timeline is a fair ask for the above. An important side note here is that we usually look at multiple deals at any point in time and the 4 to 6 weeks period is not exclusive to a single opportunity. Moreover, this period enables us to interact with the founders more deeply to get a level of comfort for all parties involved – both the founders and MV are in it for the long haul, if we do invest!
Finally, we respect the time invested by the founding team during this process and make it a point to communicate our learnings from the diligence to the founder, even when we pass!
We would love to know your feedback on our process!