ANGEL CAPITAL SUMMIT PRESENTATION: Due Diligence: Your Offensive Line, Your Offensive Weapon. This presentation takes the reader through the due diligence process at a high level and sets expectations around what angel investors should be analyzing and exploring when analyzing a potential angel investment. Specifically, it covers how long should an angel investor spend on due diligence, an efficient due diligence process to quickly weed out unattractive deals and what things are analyzed when performing deep due diligence. Ryan Goral, Founder of Strategic Equity Partners, www.separtners-llc.com

1. Due Diligence
Your Offensive Line, Your Offensive
Weapon

2. Care and diligence bring luck.
Thomas Fuller

3. Why Due Diligence is Important
Returns are positively correlated to hours spent on
due diligence
More than 40
hours = 7.1x
returns
Less than 20
hours = 1.1x
returns

4. What is the right amount of due
diligence?
• Due Diligence Sweet Spot ~ 40 hours
– Not an exact science and depends on the deal
• More doesn’t correlate to higher returns
– Diminishing returns after initial threshold met
• Need to be intentional and deliberate when you
perform due diligence – in other words:
Know what you are looking for and where to
look for it.

5. Due Diligence Process
Phase II – Deep Due
Phase I – High Level Diligence
Sniff Test • Using Mullins Framework
• Due Diligence Checklist

6. The Seven Domains of
Attractive Opportunities
Market Domains Industry Domains
Macro Market Attractiveness Industry Attractiveness
Level
Mission, Ability to
Aspirations, Execute
Propensity on CSFs
for Risk
Team
Domains
Micro
Connectedness up
Level and down Value Chain
Target Segment Benefits Sustainable Advantage
and Attractiveness
© 2006 John W. Mullins

7. Due Diligence
Phase I
Management Team Produce/Service
IP Potential
Experience Description
Valuation
Reasonableness, High-
Target Market Clarity Industry Definition Level Financial
Summary, Exit
Possibilities
High-Level Risk
Assessment

8. Due Diligence
Phase II
Product/service
Management Team comparison to direct IP research and
Analysis and indirect investigation
competitive offerings
Details on the target
Valuation comparisons
market and break- Competitive matrix
and detailed financial
down on the with positioning
analysis, exit scenarios
company’s marketing analysis
and target ROI
plan
Detailed risk
assessment

9. Due Diligence Product/Service
• Features versus benefits
• What is the pain being solved?
• How does the product/service’s benefits
relieve that pain?
• Current product/service alternatives?
• IP potential?

10. Micro-Market Analysis
• What benefits does the offering provide
that other solutions don’t?

11. Micro-Market Analysis
•What customer pain will the offering resolve?
•How strong of an incentive do customers have
to give you their money?
–Evidence?
•Will customers purchase at a price that works
for the business model?

12. Micro-Market Analysis
• What evidence can you provide to show that
your target market has the potential to grow?
• Are there other segments that could benefit
from a related offering? How do they benefit?
• Can you develop capabilities that are
transferable from one segment to another?

13. Micro-Market Analysis
• How attractive is the micro-market?
– Fit market into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive

14. Macro-Market Analysis
• Secondary research
How big is the market? • Number of potential customers
• One year growth?
How fast has the market • Two year growth?
grown historically? • Five year growth?
• Next 6 months?
How fast will the market • Next 2 years?
grow? • Next 5 years?
What trends will affect • Economic, demographic, sociocultural, technological, regulatory
the market? or natural.

15. Macro-Market Analysis
• How attractive is the Macro-Market?
– Fit market into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive

16. Industry Analysis
Porter’s Five Forces

17. Industry Analysis
Blue Ocean or Bloody Ocean
“Blue oceans….denote all the industries not in existence today – the
unknown market space, untainted by competition. In blue oceans,
demand is created rather than fought over. There is ample
opportunity for growth that is both profitable and rapid.”
Bloody Oceans – industry characteristics where companies fight
and primarily compete on price.

18. Industry Analysis
• How attractive is the Industry?
– Fit industry into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive

19. Management Team
Execution Risk
• Does the management team have the relevant
experience necessary to execute the business
plan?
– Industry Skills?
– Technical Skills?
– Transferable Skills?
• Passion?

20. Management Analysis
• How attractive is the Management Team?
– Fit into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive

21. Financial Analysis
• What is the company’s revenue Model
• Are the revenue projections realistic?
– Has the founders included the details on ‘how’
they plan on achieving these projections?
• Gross, operational and net margins?
• Sources and uses of funds?
• Projections
– Management, downside and upside scenarios?
– ROI for investors?

22. Financial Analysis
• How attractive are the financial terms?
– Fit into one of three buckets:
• Attractive
• Fairly attractive
• Not attractive

23. Risk Assessment
• Industry Risk
– Changes to Porter’s Five Forces
• Market (Product/Service) Risk
– Changes in customer preference
• Financial Risk
– Appropriateness of fund sources and uses
• Execution Risk
– Management team execution ability

24. Due Diligence Checklist
- Attachment

25. Efficient Due Diligence
• How can you work with others to share in due
diligence tasks?
– Angel groups/forums
• Deal flow
• Collaboration
• Leverage investor specialties/experience
– Lead investor strategy
– Due diligence delegation based on specialties

26. Q&A
Ryan Goral
www.separtners-llc.com
Twitter: @ryangoral