Due-diligence at LVC/LABS
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Due-diligence at LVC/LABS
How do we assess potential founders before investing or scouting a startup.
In the world of VC, helping a founder to understand the process that they're about to go through when raising an early-stage round, can be both time-consuming and stressful - for both parties involved!
And while the diligence process varies from fund to fund, there is a general process that most founders must go through when looking to raise. While we won’t be touching on what other funds do in this blog, we will be discussing what you can expect when joining LVC/LABS as a founder.
Team Diligence
Who are you and your team and what is your background?
Founder Potential Diagnostic: LEONVC's Founder Potential Diagnostic is a quick, three-minute diagnostic aimed at assessing the strengths and weaknesses of startup founders. The survey generates a Founder Potential Score using a unique LLM-based algorithm that merges survey responses with our extensive database of founder insights. This score offers a comprehensive view of a founder's aptitude and their startup's investment readiness, factoring in personal attributes, company metrics, and investment indicators. It is also the first of its kind to be correlated against MOIC.
Organization Health Diagnostic: Another unique aspect of our diligence process is taking into account the organizational health of your company, and the general sentiment of your employees. This data set not only helps us as investors understand the inner workings of your company but also highlights for the founder, potential risk factors within the organization. And let’s be honest, although your team has delivered up until this point, we as investors, want to understand how sustainable that growth is from a people perspective - and if you have the team to deliver on that growth.
Background Checks: Obvious one here. We need to ensure that all founders and key team members have clean legal and financial histories.
Reference Calls: While reference checks are not unique to the VC world, LVC/LABS has developed a model that both quantifies and standardizes the reference check process, removing any internal bias or personal relationships in the process. Unfortunately for a founder, the backchanneling of the reference check process is standard practice in the VC space, and we’re not huge fans of it.
Relevant Experience and Level of Commitment
Relevant Experience: This matters, to a point. Yes, we would love it if you have a massive amount of industry experience, but it’s not a be-all-end-all in our eyes.
Level of Commitment: Another obvious one. The short of is this: Are you willing to do what it takes to succeed?
Market Diligence
How do you scale, who are your competitors and how BIG could this thing really be?
Market Size Assumptions: Be ready to substantiate your Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM). And please, be honest. We get that these levels of insight are not an exact science, so no need to shoot for the moon.
Competitor Analysis: We also develop a SWOT analysis and an understanding of your competitors' customer bases, pricing strategies, and USPs.
Product-Market Fit and Sales Channels
Product-Market Fit Analysis: We may ask you to produce data on customer acquisition, churn rates, and lifetime value.
Cost and Viability of Sales Channels: We evaluate the most cost-effective sales and distribution channels for your product.
Customer Reference and Long-Term Vision
Customer Reference Calls: We will ask for a list of existing clients or pilot users who can attest to the efficacy of your product.
Long-Term Vision and Exit Potential: Prepare a compelling vision for your startup and its potential exit strategies, be it IPO, acquisition, or otherwise.
Product/Technical Diligence
Did you build a great product?
Demo: We will ask for a product demo, and examples of use cases for potential users.
Scalability and Product Roadmap: We may ask you to produce a 12 to 18-month roadmap that reflects scalability and development milestones.
Defensibility and Third-Party Tech Review
IP Protections: We will ask you to document all intellectual property with the correct legal protections.
Third-Party Tech Review: While we are not big here, we may ask you to undergo a third-party technology assessment for an unbiased view of your tech stack's strengths and vulnerabilities.
Financial Diligence
Show me the money.
Soundness of Assumptions: If you’ve made financial projections, make sure they are based on realistic assumptions.
Unit Economics: We expect you to have a deep understanding of your Customer Acquisition Cost (CAC), Lifetime Value (LTV), and other pertinent unit economics. And if you’re early stage enough where this is not possible, just have a general assumption.
Independent and Unqualified Financials
Financial Statements: Make sure your financial statements are verified, transparent, and in compliance with accounting standards.
Legal Due Diligence
E.G. Let’s both avoid getting sued in this process.
COI/Bylaws, Initial Board Actions, Stock Issuances, Option Pool: Yes, we make sure your corporate governance documents are in order.
Founder's stock purchase documents, Employee option grants, and 409(a) reports: These should be accurate and up-to-date.
IP and Employee Agreements
IP Assignments/Employee Agreements: Ensure all IP is assigned to the company and that all employees, including founders, have signed the appropriate legal documents.
Board Approval
Board Approval of Investment: Please, make sure that the board has formally approved the investment opportunity!
So that’s it?
I know what you’re thinking.
But it is what it is, and no matter who writes you that check, diligence will be done, my friend.
What you need to make sure of is this:
Know what the hell you are talking about!
And if you don’t, that‘s okay too.
Link: Just tell us. This is why we’re here, and this is our expertise.