How Does Lateral Evaluate Potential Investments?
There is no straight line from learning about a new company to a decision to invest. Different issues have priority in individual evaluations. The key is this: We generally decide to invest in the first five minutes of learning about the company. This is because we know right away whether the company fits to our strategic criteria. And it’s typically obvious whether the product or service has a market or not. If it doesn’t fit, we try to say so right away. The rest of the decision process is Due Diligence – trying to uncover potholes into which the company could fall or “critical flaws” in the business model.
If enough issues crop up, our assessment declines and we decline. The list of questions below will help prospective companies answer our typical Due Diligence questions for themselves. By the way, this list is not original to us. We borrowed big chucks of it from fellow investor, John O. Huston, then added our thoughts!
Business Plan and Vision
- Can the company answer The Five Questions with relative confidence?
- “Why” does the organization really exist?
- “Where” is the organization headed long-term?
- “What” will the organization achieve in the next 3 years?
- “How” will these goals be achieved?
- “Which” work will the organization NOT do?
- Does the company operate according to some kind of simple strategic plan which everyone in the organization understands? Is there a clear process for changing the plan when needed?
- Are all the required inventions, resources and financial milestones spelled out in the plan? Does the plan balance costs and customers to give a realistic forecast of growth?
- Does the projected growth rate make sense? Does it seem like customers can be added at the rate proposed? Are selling skills and resources in place?
- Does everyone in the organization operate according to a formal schedule of who needs to do what by when?
- Is there a process in place to govern spending and hiring so as to assure progress against the plan in a way which honors the budget?
- Does the CEO possess the level of intelligence, energy, ethics and determination required to drive the company?
- Has the CEO previously demonstrated management, team-building and leadership abilities in a resource-constrained environment? Has the CEO succeeded before on a “do-it-yourself” basis?
- Can the CEO recruit (help select and then sell) great, critical hires?
- Can the CEO attract capital, board members, key customers, and strategic corporate partners?
- Does the CEO have a “partner” in the company; someone with complementary strengths and offsetting skills? Do they get along really well?
- Does the company have a fundamental, defensible, and measurably superior technology?
- Does the product have well-defined features and functions? Will they be seen as benefits by the customer, not just nice to have?
- Does the company have the development/engineering talent to support the initial product? Can they keep evolving the product in response to customer needs or the competitive market? Can the current team build the next generation of follow-on products?
- Is the product benefit promise big enough to support the price the company intends to charge? Does it match what the market will pay? Can customers who buy the company’s product or service get a cash-on-cash payout in under 12 months?
- Does the company have a well-defined process for producing products at the cost, quality and on the schedule required by its customers? Can it scale up its product manufacturing or service delivery process rapidly? Do they have product and process specifications which outside contractors can understand?
- Is the top-level team composed of individuals of impeccable character? Do they have measurable, relevant experience and expertise?
- Are they capable of attracting Grade-A staff as well as leading and managing their respective functions?
- Is the team “do” oriented rather than “management” oriented? Or will they confuse activity with accomplishment?
- Can each of the members “play” several positions on his or her team as opposed to just managing a team of players?
- Do the members behave collectively as an integrated team as opposed to operating as a collection of individuals?
- Does the company have a good understanding of what it will take to sell the product – together with a sales leader who can implement it?
- Does the sales group and its leader have an understanding of what it takes to sell to this class of customers? Does the sales leader have a clear understanding of what the product does and doesn’t do for the customer?
- Is there a clear view of the most likely group of buyers are and how they can be reached efficiently?
- How will the product or service be delivered and installed? Are there any missing components needed to deliver a complete product to the buyer?
- What will the buyer tell him/herself is the rationale for issuing a Purchase Order for the company’s product – in terms of features, functions, and (most important) benefits?
- How will the product get to the customer and at what cost? What are the distribution channels?
- Does the company have a driven sales leader?
Board of Directors
- Is the Board composed of individuals whose experience and expertise enhance the company’s competence? Or are they just placeholders? “Great guys” from the world of “used to be” who happen to have money to invest?
- Can the Board shepherd the company for the period of our investment?
- Are all of them also investors, with skin in the game?
- Do Board members act as reviewers, counselors, and company missionaries for sales and finance? Do they understand their role; that they are not running the company?
- Is the Board reviewing the firm’s strategic plans and direction as well as providing the CEO with advice about current operations?
- Is the Board focused continuously on selling the company; when and for how much?
- Does the company have enough cash to complete the current stage according to plan … with a 20% safety margin? Can it “live” to see the following stage while it secures the next round of financing?
- Can the company name multiple investors they believe will be willing to contribute to the next stage of the company’s growth? With whom have they spoken to get that feedback? Based on the product and market outlook for the firm in the context of their feelings about the economy and the market sector?