In Part I of the due diligence series, we discussed the technical considerations, while in Part II, we addressed the legal aspect. This section shall dive deeper into the business considerations you need to put in place to pass the due diligence process.
What problems does your project solve?
Emerging technologies are sometimes referred to as “solutions looking for problems”- not unjustly, though. Behind the appealing plot and excellent technological concept, it may be easy to lose the essential question: who is your target audience? Why will they use your proposed solution?
Check if the problem you are trying to solve does exist by confirming potential users. Customer surveys and tests can enable you to move in the right direction. If a business operates in a vacuum with no direct contact with its target audience- it is a red flag for investors since it risks meeting no demand once it launches.
How is the problem currently solved? How is your proposal better?
A project must provide a clear and unique solution to users for it to be embraced. If the project has marginal benefits, customers are unlikely to embrace it or bother switching from their old service providers at all. Therefore, ensure your project has to lead a competitive analysis and establish its niche in the market.
What are the primary assumptions on which the business model is based? How are they validated or going to be validated?
How do you plan to make money? What metrics, in such cases, determine the profits? Are your revenue projections realistic? For instance, if transaction charges are the primary source of revenue, you should expect specific transaction volumes, and they should be justified by market analysis.
What is the place of your business in the industry value chain? Who are the other partners you plan to work with? How do you manage your supply chain sustainability?
No business delivers its value to end users independently. Successful business forges great business partnerships that drive them to their next levels. It is vital to establish the precise added value your business offers. All other partners in the value chain should be regarded as external dependencies that may be risky. Therefore, they should be managed by diversification.
How does the unit economics of the company work? Can it be profitable at all?
Does one user bring more cash than it costs to host him/her, including processing and acquisition costs? In the case of broken unit economics, is the increased income per user possible, or they will not pay more? Is it possible to reduce expenses in the future with significant investments, for example, software that minimizes operational costs or marketing that increases credibility, minimizing acquisition expense?
In other words, investors always consider the factors that justify the investment opportunity. What is your growth strategy? How is your growth engine validated? Does it fit nicely into your business model?
To practice your investment practices, you should have an individual growth potential that aligns well with the risks. For an operationally profitable business, the growth expectation is lower than a start-up. A business with the possibility of a viral growth prospect differs greatly from a B2B company that employs a sales department.
Final Thoughts on How to Pass the Due Diligence Process
A tech project that is considering winning serious partners, attracting significant funding rounds, or raising its public and media awareness will definitely become subject to systematic scrutiny that will target not only the apparent factors and quality of the concept but also other more profound things, such as taxes, IP, cybersecurity, and supply chain resilience. Having answers to these questions in advance makes you well prepared for the due diligence process and gives you the ability to succeed in the stiff competition once you launch your product.
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