Thursday, January 03, 2008

New Deal Checklist

Pilots, no matter how many flying hours they have, never take off without checking their pre-flight checklist. The risks of oversight, missing a mechanical or procedural failure, etc are too severe not to ensure all systems are go.

I put together an analog to the pre-flight checklist - a new deal checklist - that I hope will similarly help avoid losses due to "pilot error."

In the spirit of transparency, please see my list below and let me know if you think I am missing any core issues.
  1. Can I understand the business?
    1. what is the product?
    2. what is the value?
    3. who is the buyer and why would they buy?
    4. can the buyer quantify the value? If so, what unit?
  2. Is the market attractive?
    1. Growth rates?
    2. Profitability?
  3. Is there a fundamental disruption that is the basis for the opportunity and limits the incubments' competitive repsonse?
    1. Market --> SaaS, Open Source
    2. Product --> core innovation
  4. Is the product delivered in a buyer appropriate way?
    1. open source for infrastructure
    2. SaaS for a business app buyer
    3. REST/SOAP/JavaScript for a web service
  5. Is the core value tied to a technical innovation?
    1. ex. HWVP's portfolio company examples = Baynote's collective intelligence algorithms and Move Networks' streaming protocols
  6. Are their frictions in....?
    1. time and resources required to test the value proposition?
    2. time and resources required to deploy?
    3. time and risk to realize value?
  7. Is there a good market comparable for both the business model and the exit multiple?
  8. What unit scales the revenue model?
    1. page views, sales heads, downloads, sessions?
  9. Is the architecture scalable and does it leverage the best available infrastructure - EC2, S3, Rackspace, etc?
  10. Are there exogenous dependencies?
    1. carrier or MSO deals?
    2. RFID deployments, etc?
  11. Is there a market master?
    1. WMT or MSFT or Dell....
    2. Who is the incumbent? How will they react?
  12. Who are the other new companies in the space?
  13. Is the team able and honest?
    1. Prior track record of working together?
  14. Is the CEO special?
    1. What is his/her motivation, passion, strength?
    2. Where do they need help and complement?
  15. Are the round size and pre-money reasonable?
  16. Is the model reasonable (profit margins, growth, burn)?
  17. Is the plan capital efficient?
    1. how much money for 18 months?
    2. margin of safety?
    3. are their clear milestones in the plan that will allow for an objective assessment of value creation - ie a new investor
  18. Can this be a homerun?
  19. What are the core risks?
    1. why will the company fail? is their a plan in place to mitigate such risks?
  20. What are the KPIs - ie leading indicators to measure and track the company's progress?
  21. Is the cap table clean and the paid-in capital reasonable?
    1. Is the progress to date commensurate with the money in?
    2. Has the money in to date been productive?
While I am sure there are risk and questions not raised above, the goal is to systematically measure a prospect against a consistent analytical framework that, hopefully, ensures smooth take-offs, flights, and landings.


  1. May be covered in the "other new companies" category, but..
    Are there any alternative technologies (deployed or not) which are potentially more disruptive if applied to the customer need or product. As an example, it's not clear to me where in the analysis you might have surfaced the risk of VHS before investing in betamax technology.
    Also, interesting to me that you appear not to have any consideration of scaleability in the application or managing it in terms of infrastructure requirements. Maybe everybody uses Amazon and it is no longer a concern.
    If anybody comes up with a worthwhile addition to the checklist I hope you update the list.

  2. This is Will - someone emailed me their list of questions to ask - i include it here below.

    Does the solution address an important need?
    Do the customers agree that it is an important need?
    Who are the specific buyers for this product. Do they have power, influence and spending authority?
    Are there a large number of buyers, i.e., what is the market size? How big, how fast?
    Does the company have traction with key, brand-name clients?

    Is the underlying technology sound, complete and scalable, i.e., does it work?
    Is the technology presented to the user in a way that they can achieve high value in a short amount of time, with little resources required?
    Does implementation of the solution create significant disruption/threats within the clients IT organization?
    Is the technology protected by I/P?
    Does the company have the expertise to implement the solution in a high quality fashion?

    Does the company have a fundamentally sound customer profitability model that generates substantial, sustainable profitability at scale?
    Does the management team have the experience to manage the company through a high growth period?
    Does the management team understand how to use cash to drive revenue, while minimizing the buildup of operating expense?
    Are there a large number of potential acquirers for the company?
    Does this represent a strategic purchase or a product tuck-under for these companies?
    Are the downside risks manageable?

  3. Smithosity8:48 PM

    Hi Will,

    I really enjoy your blog entries. I'd like to ask your opinion of the following: I am going out, along with two other partners, to get funding for our web start-up. What percentage of the company can we expect to give up in order to receive seed funding? How about during the VC phase?