We see hundreds of deals per year and there are many commonalities in those that do not receive funding. Most often, it is because they are not prepared to begin serious diligence. Some honestly, but naively, believe the process is more emotional that rational. Others simply have not done their homework and are looking for free consulting. At any rate, there are common questions that ALL entrepreneurs should be prepared to answer upon request if they are serious about seeking, accepting, and becoming a good steward of your capital.Questions to be discussed within the investment fund executive or due diligence committee:

  • At what stage is the project: Exploratory (Idea/Concept Creation)? Early Development (Technology Prototype & Market Evaluation)? Late Development (Reduction of Technology to Commercial Prototype; Engineering Performance Testing)? Market Testing (Testing of Production Process & Market Acceptance Testing)? Commercialization (Production & Product Launch)?
  • Market
    • Is the project well-defined?
    • How clearly articulated is the high concept?
    • What is the essential benefit this project seeks to deliver to customers?
    • What is the entry wedge or initial target market?
    • What is the quantified, accessible market size and scope?
    • What is the quantified, accessible market growth rate?
    • What is the quantified, accessible market stability?
    • What different groups or market segments are relevant to this project?
    • Who buys products in the target market? Why? Why not?
    • Does the product demonstrate uniqueness in its market?
    • What will be this projects’ market channel advantage?
    • What potential is there to preempt or dominate a market?
    • Is compelling pricing possible? How?
    • Does a market “pull” exist?
    • What is the quantifiable evidence for demand?
    • What promotional activity will be required in specific marketing channels?
    • What number of potential customers have been identified?
    • Is demand for this product cyclical? Seasonal?
    • That is the anticipated length of product life? How has it been determined?
    • Why make this product now?
    • Where in the market “hype cycle” does this product fall: Technology Trigger? Peak of Inflated Expectation? Trough of Disillusionment? Slope of Enlightenment? Plateau of Profitability?
    • Does the presentation include a concise explanation as to why the project should garner attention, or why anyone would care?
  • Customer
    • Who is the customer?
    • What customer problem(s) does this project solve?
    • How are customers currently solving their problems?
    • How do customers use products that currently solve their problem?
    • How do customers feel about their current solution?
    • What evidence is there for switching behavior in customers?
    • What customer like or dislike does this project address?
    • How will a customer perceive that their problem is solved?
    • How will customers be surprised or delighted by this project?
    • Does the product hold the customers’ attention? How?
    • What need is there for customer education to alter existing habits and practices?
  • Competitors
    • Have competitors been identified?
    • Who are the competitors and leading brands? What is their brand positioning? Image?
    • Can the product sustain its differentiation from competitors?
    • What are competitors’ product strengths and weaknesses?
    • How will competitors react to this project? What have they done in the past?
    • What are competitors’ intellectual property strategies, and how relevant are they?
    • What is the project’s financial status relative to competitors?
    • Who or what are the top performers among the product’s competition?
  • Gaps/Ideas
    • What about the new product feels powerful and special—resonates with prospective customers?
    • What elements make interacting with the new product more or less enjoyable?
    • When people see the new product, will they want to interact with it before they start to use it? Even before they know what it does?
    • What skills does the new product require of the user? Does the product demand the right level of skill?
    • Is this a new product for novices or experts?
    • Is there anything strange in this new product that users talk about excitedly?
    • To what base instincts does the product appear? What higher interests? Can it appeal to more of them?
    • To whom can users relate their product experience that will actually care?
    • How does the project fit the company’s strategic business?
    • What are the consequences if the project fails or remains unfunded?
  • Capability/Technology
    • Is the project technically feasible?
    • Are the prototype system requirements defined?
    • What design and production capabilities are required?
    • If software, what software engine is required? Existing or custom-created?
    • Has a prototype risk analysis been performed?
    • Regarding the project’s Technology Readiness Level (TRL): i. Are systems or components described as TRL 1-2 (Basic Technology Research)? YES/NO
      ii. Are systems or components described as TRL 3 (Research to Prove Feasibility)? YES/NO
      iii. Are systems or components described as TRL 4-5 (Technology Development)? YES/NO
      iv. Are systems or components described as TRL 6 (Technology Demonstration)? YES/NO
      v. Are systems or components described as TRL 7-8 (System Commissioning)? YES/NO
      vi. Are systems or components described as TRL 9 (System Operations)? YES/NO
    • Can the overall and component presumed Technology Readiness Level (TRL) be demonstrated or independently validated by experimentation?
    • What major development tasks are required in the project?
    • What experimental features are involved?
    • How much work in years has been invested to date?
    • What external costs are expected to be created by the project?
    • What is the proprietary status of the project technology?
    • What level of effort will be required to advance the project relative to past effort and present technology status?
    • What technical risks are involved?
    • What technical alternatives are available, if any?
    • What is the estimated new R&D funding required to launch the product?
    • What are the itemized lab and development facilities that will be required?
    • What research know-how is required? Does it exist within the company or will outside resources be required? If so, what resources?
    • What is the estimated schedule for technical development?
    • Is the product feasible to manufacture?
    • Have manufacturing requirements for the prototype or commercial product been defined?
    • What platform(s) will the prototype or commercial product be developed on?
    • Is there to be a single product of a line of products?
    • Are material inputs available at a cost that would allow product profitability?
    • Is manufacturing or publishing equipment available at a cost that would allow product profitability?
    • Has manufacturing complexity been determined to be acceptable?
    • Are packaging and labeling requirements determined and acceptable?
    • Are industry regulations and standards identified?
    • What federal agency registrations are required?
    • What state registrations are required?
    • What consumer safety or watchdog organization approvals are required?
    • Are rights agreements or intellectual property licenses required and in place?

Investors of Angel Capital Group, Appalachian Angel Investor Alliance, and affiliated funds, please feel free to print this article and give it to a company in need of a reality check with regard to dealing with companies founded by inventors.

This is published under the Appalachian Regional Commission POWER Grant, PW-1835-M.

Copyright Appalachian Investors Alliance, Inc. 2018
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