At Flying Doctors Healthcare Investment Company (“FDHIC” or “The Company”), due diligence is conducted on start-ups and is carried out in a systematic way to enable us to make calculated and informed investment decisions. As a venture capital firm, FDHIC invests and empowers scalable tech-enabled start-ups in the health and financial sector.
During due diligence, we ask every founder pertinent business and investment questions to garner insights and valuable information to make an informed decision. It involves examining the identified problem, market, products (solution), competitive advantage, business risks, growth and expansion plan, traction, financial performance, management, valuation, and valuation multiples.
This article will delve into some of the questions we ask every founder during due diligence. Performing this as part of the due diligence will allow us to gain essential information and identify a possible new investment.
In the end, by making inquiries into certain aspects, we will understand the business and gain a balanced view of the opportunities and challenges in the start-up. This will allow us to make a rational investment decision in a potential portfolio company.
Question 1: Problem Statement
The first question is for us to find out the exact problem the start-up is solving. This is where we figure out the heart of the start-up idea. It is what intrigues us as a venture capital firm. You should focus your efforts on clearly articulating the problem statement that will set the stage for the solution you are proffering. When a problem statement is properly defined, it gives us some perspective.
Question 2: Your novel idea – Solution
When we have understood the problem(s) your start-up intends to solve, it is best to know exactly the solution you are proffering to the identified problems. The solution should be customer-centric, innovative, and solve a particular market need.
Question 3: Competitive Advantage
Now that we have a feel of what your solution is to the identified problem, it’s time to know what makes your services or product different or unique from competitors’ service/product offerings. If you are uncertain about what differentiates your start-up idea from competitors, you should look to fill in any gaps here before moving forward. Sometimes, beyond solving a problem, there must be a differentiating factor to attract and retain customers.
Question 4: Business and regulatory risks
Now it’s time to get to the nitty-gritty of performing due diligence on a start-up. Every business is exposed to certain economic, political, and regulatory risks. The founder should ascertain the level of exposure to these risks alongside business-specific risks and devise measures to reduce the influence on the business. It is imperative to analyse the risk the business is exposed to and assess the mitigating factors proffered by the founder.
Question 5: Scale/Growth Plan
One of the insights we like to get from founders borders around the expansion and growth plan for the business. Beyond the uniqueness of the product/service offering, we are curious to know the scaling potential of the business. Some pertinent questions we ask include:
- What traction has the product/service gathered since its launch?
- Are you looking to include other revenue-generating and attractive features to remain competitive?
- Are the products/services well-suited to scale in other markets?
- Are there plans to expand geographically or increase sales in the short to medium term?
Question 6: Team Composition
At this point, we will want to nail down what your team composition is made up of. This entails detailing the experience and expertise, entrepreneurial drive, and commitment of the management team. The wealth of experience of the management team in the country and industry of interest will always be a big factor during due diligence because it has a great effect on the success of the business.
Question 7: Valuation
Setting this vital question aside makes sure that we always consider the pricing of the investment and have a view of possible exit plans at hand. We are keen to know the valuation and valuation multiples. We benchmark the valuation multiples with industry standards and our threshold to estimate a fair valuation.
Once we have asked these questions, we would be able to evaluate the start-up’s potential and how the start-up might fit as one of our portfolio companies. However, taking into cognizance these questions and more should save founders from missing something that could be vital to the value proposition of their start-ups. Got a question that you see other venture capital firms asking that we didn’t list? Share them in the comments below.