Wed, 23 March 2022
Risks and Assumptions
Hello, this is Hall T. Martin with the Startup Funding Espresso -- your daily shot of startup funding and investing.
In diligencing a startup, it’s important to articulate the risks and the assumptions you have about the startup.
Start by identifying the risks in the deal.
The team, product, market, technology, and competition are key sources of risk.
List out each one and what risks the company faces. Prioritize the most important at the top and list in descending order.
Write out the assumptions you are making about the deal.
I find new information often comes to light through the due diligence process, so it’s important to track what you believe to be true about the deal.
Articulate the investment thesis for how this will become a successful investment and not just a successful company.
Writing out the investment thesis forces you to think it through more carefully.
Seeing it written out gives you a sanity check.
For the investment thesis, estimate the potential size of the company, the probability of success, and the return that can be achieved.
Will this become a billion-dollar company or just a few million dollars?
Are there a handful of competitors in the market or thousands?
Are the buyouts in the space in 9-figure exits, 8-figure exits, or less?
Writing out the risks and assumptions will help you gain a better understanding of the deal.
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