A checklist guide on how VCs evaluate impact startups

Startup due diligence is a necessary process for venture capitalists to assess the feasibility and potential of a startup. According to Tech Crunch, most deals fall apart at the due diligence, so it’s especially critical for founders to be familiar with this process and understand what exactly VCs are looking at. This process has an additional layer of complexity for impact founders, who need to show the potential to scale and become a profitable business and meet its impact goals.

But what is venture capital due diligence? And how does the process for impact startups differ from generic due diligence?

While there’s no standard process for impact VC’s due diligence, there are 4 core areas of investigation directly relating to business success.

Keep in mind that some VCs opt for a more quantitative metric-driven due diligence process, while others actively steer clear from benchmarks. Remember to research this before reaching out to a VC and have all the information available.

1. Management Team 🌟

This should come as no surprise. Whether founders are working on an impact-driven solution or not, the management team is the most critical factor in considering an investment opportunity.

There’s no set formula to determine a “good” team, and every investor has their preferences. Essentially, VCs are looking for “founder-market fit” and to evaluate that, they look at the following:

• What are the experiences, credentials, and track records of the founders?

• Who are the team’s advisors? What complementary skills and resources do they bring?

• What is the structure of the team?

• How does the team collaborate?

From an impact dimension, VCs will further evaluate:

• What was the purpose of starting this venture?

• What is the team’s vision for impact?

• How committed is the founding team to solving the problem?

• How committed is the founding team to solving the problem?

2. Solution — Product/ Service 🎯

At the early stages, the product or service is evaluated on its broad application, i.e., why it is necessary and what market problem it solves. In many cases, VCs also request a product demo to validate whether the solution works as advertised. Some key questions that have to be answered are:

• How has the solution been validated by customers and other stakeholders?

• What early feedback has the team received on the product/ service?

• What does the sales cycle look like (spur-of-the-moment decision or lengthy sales process)?

When it comes to evaluating impact startups, VCs will further look at:

• How well is impact integrated into the business model?

• Does the company rely on grants/ tax reliefs as part of its business model?

• What evidence is there that the company’s product or service will lead to specific outcomes that matter?

3. Market 🦄

Typically, VCs seek to analyze the industry and make sense of a company’s target market, competition, barriers to entry, and the niche the company is targeted. This works hand-in-hand with evaluating the quality of the solution. Key questions include:

• What is the total addressable market (TAM)?

• What is the trajectory for growth for the market?

• How does the competitive landscape look in the market?

However, impact VCs will also look at the market from the perspective of the potential for impact.

• What are the impact challenges within the industry right now?

• Are there any positive/ negative macro-factors that will affect the company in this market in the future?

4. Technology 🚀

This section will vary drastically depending on your solution’s reliance on technology and whether it falls under the category of “deep-tech” or not. Teams rolling out novel technologies should expect a much more robust technical due diligence process. At the earliest stages, due diligence will evaluate the probability of the technology being built, its advantages over existing solutions, and the critical bottlenecks to wide-scale adoption. This includes answering questions such as:

• What does the technology evolution plan/ roadmap look like?

• What is the status of IP?

• What is the pathway to scaling up?

• What would be the most significant challenges when translating bench-scale findings to large-scale production?

Suppose your startup is building technology to address an environmental or social problem. In that case, VCs will also seek to validate how the technology deployed can actually help to achieve impact-driven goals, e.g., how much a cultivated meat alternative can lower CO2 emissions compared to conventional meat.

• How will the company be able to measure impact — immediately and over time?

Remember that due diligence is part of the funding process that all founding teams must undergo to raise successfully. At the end of the day, investors are trying to understand you and your business and evaluate your probability that you can generate their desired returns and impact.

No matter where you and your team are in your startup’s journey, use this guide to help uncover any weak spots and be an opportunity for you to address any critical gaps and issues proactively.

If this leaves you with any questions, feel free to get in touch.

Ilina