With the recent name change of my employing firm I figured I would re-visit many of the basics of my job, one of which being my approach to due diligence.

Last year I posted about the due diligence process and a business plan breakdown, but over time my viewpoints on analysis have slightly shifted. It seems that a good portion of deals I review are past the earliest stage and have added a couple members of management and possibly infused seed capital. For the past couple months I have been experimenting with the approach of looking at each company from the view points of opportunity and the company’s ability to capture this opportunity.

The opportunity of a deal consists of the main pieces of why and how a problem is being solved, i.e. the technology, product, business model and market. Basically the analysis of ‘is this a technology that can be used to create a product that is needed (and wanted) in the marketplace and priced in a range that will attract consumer dollars.’

The opportunity ‘capturability’ (no, this is not really a word but I have yet to find an accurate descriptor) lies in the factors that will push the aforementioned opportunity into fruition, a trickier mix of variables to encounter. The ability to capitalize on an opportunity analyzes the competition and the levels of competitive presence in the market, financial stability, market risks … but mostly the strength of the management team. Basically, ‘does the summation of the competitors in the marketplace plus the known risks equal a market gap that can be seized by this management team and the capital they have received?’

The overlay of the ability to capture and the opportunity itself will never perfectly align as the alignment discrepancy is the risk of the deal, the risk the investor must decide if they are willing to take to earn the projected reward.

Right now I am using this approach without quantifying each variable, which would be do-able. I have yet to quantify as it seems that an integral part of our investment decision is based on our gut feel towards the management team, something quite hard to explain in numbers. I also use this approach to simply assist me in thinking about the relationship and correlation of all the business elements.