In the last edition, we read from professionals who shared some of their experiences during the due diligence process and how founders can improve the quality of their organizations. Over the next few editions, we will address some of that feedback. Due diligence is a weighty topic. To ensure that it doesn’t overwhelm you, we will be splitting it into parts. For today, we will focus on definitions and aspects of due diligence you should be aware of to prepare your organization.
What is due diligence?
In an article published by Neotas, due diligence is defined as, “... the meticulous process of conducting comprehensive investigations and assessments on a potential investment opportunity. It entails a thorough assessment of various aspects of the asset, ensuring that it aligns with the expectations and criteria set forth in the investment proposal.” Impact investors do not want to invest in an impact-oriented organization just because it says it is one. They have to assess to see how the product works, the risks, the market opportunity and competitive landscape, the impact potential, and the team leading the organization. This information will be derived by assessing industry benchmarks and existing research, reviewing the competitive landscape, and speaking with the leadership team, customers, and experts in the field. This ensures they are clear on the pros and cons of the proposed investment opportunity before making the investment decision. Before you count your organization unworthy of impact investment, understand that there are no perfect organizations for investment. Impact investors have to weigh several factors and then make a decision. So, honesty, transparency, and a willingness to grow are important.
Key areas to pay attention to
During sourcing, many impact-oriented organizations that fit the investment thesis at initial assessment are selected. However, during the due diligence phase, some organizations begin to slip through the cracks. Here are key areas you must reassess in your organization:
The product/service
Is your product/service clear to your staff and customers? What is the value proposition? Is it compelling? How does the product/service lead to impact on its target market? If someone reads through your communication material (website, product catalog, etc.) will they understand what you offer and how it stands out from similar products or services? This is very important because if the impact investor does not understand it, it might raise the concern of losing potential customers because the product/service is not understood. The goal for you as a founder is to evaluate your existing offering and ensure it is clearly communicated, possesses differentiated value, and is tied to impact.
The market opportunity
How big is the market your organization plays in? Are you aware of it? Are you aware of trends and regulations in your industry that can either propel your work or constrain its effectiveness? Who are your existing competitors? Are there barriers to entry for new competitors? How will you stay ahead of the curve? As a founder, your knowledge of these should feature in how you execute your plans in your organization. It demonstrates to the impact investor that you are aware of what is happening in your business landscape and are willing to take action if you discover trends that could negatively impact your organization.
The business model
How does your organization make money? Is it a scaleable model? Are you familiar with your unit economics at the most basic level? What is your customer acquisition strategy? How much funding will you need to break even and do you know when you will break even? If you have broken even, how do you plan to stay on the profitability path? The reason it is important to have answers to these questions is because even though an impact investor is highly interested in your impact, they also want to know that you have huge potential for financial profitability.
The impact potential
Who are the primary recipients of your organization’s products/services? How is your organization contributing to a positive impact for them? What is your theory of change and how does your organization demonstrate it in real time? If your organization did not exist, would the positive impact still happen for your target market? It is important to be clear on where your organization stands on impact because if you recall, a recurring feedback from our professionals in the previous newsletter was the unclear impact trajectories of most organizations. Evaluating impact potential is crucial in the due diligence process and the next newsletter will address this in more detail.
The leadership team
Do you have a co-founder, advisors, and board members? It is popularly said that investment is done in people. Therefore, your organization has to demonstrate that you have the right people on your team in terms of passion, mission alignment, length, and breadth of experience. In one of the organizations I did due diligence for, the founders ensured the leadership team had the right mix of skills and experience. What they lacked in the founding team, they ensured that they had it through advisors and board members. A strong leadership team shows that you have you have the right help and support to advance your organization’s goals. Honesty and transparency are important here.
Next Steps
As you’ve read through and attempted to answer some of the questions raised, do you think you are ready for impact investment? If yes, good job. We will probably make a directory that can be shared with impact investors so they can find you easily. If no, what can you begin to do today, over the next 6, 12, or 18 months to strengthen your organization? In subsequent editions, we will dive deeper into impact due diligence, financial due diligence, and maybe legal due diligence.
Worth Reading
Worth Listening to
Why Due Diligence is Crucial for Impact Investment - Money Talk Viewpoint
Leverage AI in Impact Investment Due Diligence - Founder Institute
Highlighted Resource
No resource in this edition because in the next edition, I will be sharing two impact measurement and management tools that will help you take your impact measurement to the next level and check out during impact due diligence.
End Notes
If you have a product or resource that can be helpful to an impact-oriented organization on its way to becoming investible, fill out this Google form. Who knows, you might be featured in the highlighted resource section.
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PS: Are there topics you would like to see covered? Share them, and I will see how to add them to the existing content schedule.
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