Operating Due Diligence for VCs
Operational insights (non financial KPIs) are critical inputs for a VC when assessing a venture's potential. They reveal how - and if - that venture can truly scale/execute. The 'butterfly effect' is instrumental in a growing venture. Small issues (or untapped potential) in a team, can have big impact.
Why?
- Traditional VC due diligence processes rely on a standard set of homogeneous factors: " ...founders were cited the most frequently—by 95% of VC firms—as an important factor in decisions to pursue deals. The business model was cited [...] by 74% of firms, the market by 68%, and the industry by 31%". (Harvard Business Review "The Most Important Factors for Venture Capital Investing" by Paul Gompers et al., published on March 23, 2016).
- Theres a gap. Operational factors are overlooked yet they are key to how (and if) a venture can scale and execute.
- "I didn't really respect what the ops and finance people of this world did [... ] if we'd have better prepared ourselves for that [...] I think Gymshark would have grown far quicker'' (Ben Francis Founder, Gymshark. Diary of a CEO Podcast, Dec 2021).
What?
Enriching the traditional due diligence process that VCs follow when reviewing a venture, going beyond the pitch deck/data room/founder interviews.
Providing additional insights from an 'operating' mindset and listening/observing/analysing all that's happening 'on the ground'.
Feeding this back to VCs to enable more informed decision making.
How?
1) Mapping operational excellence
- Understand a venture's target operating model (if one exists) to understand how growth can be achieved
- Understanding how the range of daily operations align with the strategic vision of a venture
- Having worked with auditors, lawyers, regulators, lobbyists, compliance and 3rd parties, flagging where operational risks may be a barrier to growth / execution
2) Gaining insights from team & founders
- Observing/listening to the teams (across all levels), gaining their trust and asking the right questions to gain new insights
- Learning from subtle interactions and non-verbal signals which reveal misalignments, disagreements or culture issues which can impact team performance and execution
- Assessing how daily operational challenges/pressures may negatively impact (or be impacted by) leadership & team decision-making processes
3) Digging into operating KPIs
- Reviewing data points and team dynamics which reveal more about the real 'operating' story of that venture
- Linking these data points together - buidling an end to end picture, mapping lowest level execution behaviour to strategic roadmap
- Flagging operating challenges (or untapped potential)