Take Time to Refine Your Investment Strategy: Tips for Risk Screening and Due Diligence
It's valuable to spot trends in the capital landscape, but having solid foundations is essential to maintain discipline and focus when deploying capital and investing in emerging ventures.
Here’s a simplified guide to some of the steps in the initial stages of our investment approach at The51 and tips to refine your strategy.
Risk Screening
When we find a potential founder we’re excited about, multiple members of our investment team come together for an initial risk screening.
This is where we capture the terms of the deal, the use of proceeds, whether the company meets our 7 investment criteria, as well as a means to rank items such as investment attributes, product attributes, market attributes, leadership and team. On top of these criteria, we ensure that companies have a reasonable valuation.
💡 Tip: Aware of your criteria? Now take time to develop your investment thesis to guide you in making well-informed decisions that align with your strategic goals and risk tolerance.
Take notes from a webinar our sister organization, Movement51, hosted on this topic with the expertise of Carollynn Schafer, CEO of Accelerate Okanagan.
Due Diligence Checklist
Due diligence is the examination of financial records, financial projections, corporate and legal documents, sales and marketing material, patents, and more to confirm that the foundational assumptions regarding a prospective investment are valid.
With a promising opportunity, we’ll dive into a detailed and comprehensive checklist that considers the above factors and their:
Completeness: Do we have all relevant information needed to assess the opportunity?
Consistency: Does the plan make sense (do the financials reflect marketing strategy)?
Credibility: Do we feel that that management team can execute?
Collaboration: Does the founder seem coachable and willing to work with The51? What is The51’s value add to the company?
*4 C’s of Due Diligence: Michael Robinson
💡 Tip: Check out Common Docs from NACO Canada or the Series A Diligence Checklist from Y Combinator. These resources provide a thorough walkthrough of items under each due diligence category.
Familiarize yourself with these documents and tools. Having all of this together in one place before deciding on an opportunity will streamline negotiations and closing processes.
The51’s Investing Approach
Above and beyond the risk screening and the detailed due diligence checklist we follow, there are many considerations that guide our investment decisions, such as:
Identifying our value add: It’s essential for us to understand how we can help the company grow and reduce risks through introductions, industry expertise, and governance.
Evaluating financial and operational metrics: We’ll assess their key KPIs, milestones, and whether the requested funds will help the company reach the next stage. We’ll dive into their financial oversight to ensure they have a strong grasp of the levers of their business.
Gathering external insights: What impression have they left with the broader community? We’ll have conversations with other investors and firms to gain diverse perspectives on the deal and the founder.
Ensuring valuation and protection: We’ll explore if the investment is correctly priced to have an uplift and drive returns for our investors, and look into what kind of investor protection is in place.
Assessing founder qualities: Truly knowing the founder is key. We’ll evaluate their adaptability, grit, ability to measure impact, openness to information rights/pro-rata rights, and how well they articulate the vision, problem, solution, and target audience.
💡 Tip: To know if you’ve asked the right questions to understand a business, consider the advice from our Fund I and II Principal, inspired by her daughter’s curiosity.
Her daughter often asks about the people she meets at work, leading to ‘The51 bedtime stories’ about the incredible women creating companies. This prompts her to consider, "Can I simply explain the business to my daughter?" If the answer is yes, she knows she's covered the right ground.
Try explaining the business clearly to someone without industry knowledge. If you can, you'll know you have a comprehensive understanding of a potential investment.
Commit to Continuous Strategic Growth
The capital landscape is dynamic and constantly evolving, so you should be too. Revisit your due diligence and evaluation processes as trends and innovations shift to make informed decisions that drive success for your portfolio.
If you find your criteria and thesis align with ours—investing in future-fit women and gender-diverse-led companies—apply to become an investor in our future venture funds to join the movement of building the Financial Feminist Economy together, make an impact, and access superior returns.