Understanding Due Diligence for Early Stage Startups with Caroline Casson from Vitalize VC

[00:00:00] Rahul: Welcome back to Understanding VC. I'm your host Rahul. Understanding VC is a podcast where I have in depth conversations with venture capitalists around one specific topic related to venture capital at a time, just like a student would with a teacher. Today we'll explore VC due diligence for early stage startups with Caroline Kasson.

[00:00:18] Rahul: Caroline is a partner at Vitalize Venture Capital, a seed stage VC fund that invests in the future of work. As partners, she manages firms due diligence process besides sourcing and evaluating potential investments and supporting portfolio companies. Previously, she worked for GE Ventures in San Francisco, where she helped incubate and operate a startup in the drone space.

[00:00:37] Rahul: Now let's talk to her.

[00:00:39] Rahul: Hi, Carolyn. Uh, thank you so much for joining me today.

[00:00:42] Caroline: Thank you for having me.

[00:00:45] Rahul: Yeah. So, uh, I was, uh, researching the history of due diligence. Uh, and I learned that, you know, this practice became common thanks to the security act of US security act of 1933, uh, [00:01:00] where, you know, brokers became liable for revealing information about what they were selling. So, yeah, I love to know, what due diligence mean, especially.

[00:01:10] Rahul: When it comes to the VC investment in startups and why VCs do this?

[00:01:15] Caroline: Totally. Yeah. So just for some context at Vitalize, we invest in pre seed and seed stage companies, and at this stage, you know, diligence is, is equally as important. One, because just like founders have to raise money from investors, we as VCs have to raise money from LPs. Those are the investors in our fund.

[00:01:36] Caroline: And we Are legally responsible to those shareholders, you know, to make them a return on their investment. And so that's kind of the primary reason why we conduct diligence is to make sure that we're making smart, responsible investment decisions into the companies and ultimately driving a return for our shareholders.

[00:01:56] Caroline: So for us, diligence involves. Kind of [00:02:00] a standardized investment memo or diligence report that we've put together where we walk through a number of different categories that we'll talk through later on this call. Um, but that's kind of the framework for how we conduct the diligence on our companies. And it's important because of those shareholders that we're ultimately responsible for.

[00:02:20] Caroline: Giving a return to

[00:02:22] Rahul: Yeah, so, it's essentially looking at the potential risk of making the investment and also the potential rewards, I guess

[00:02:31] Caroline: right. Yeah. So obviously there's inherent risk in this early stage investing, just that's in the nature of investing in such early companies, but it's really looking for risks beyond that. Like we'll get into more of the details later, but any potential risks beyond just the early stage of the company that could potentially.

[00:02:51] Caroline: if you, if you missed or you didn't look at could be a reason for the, the company not being successful in the long run.

[00:02:58] Caroline: Yeah. [00:03:00] Yeah. So, I mean, it's, it's quite common, right? VCs look at the team, the product, and the market. So if you could go through all the categories, that, VCs look at from a, from a due diligence perspective, one by one, yeah, if you could go through, that would be great. Starting with obviously the team, totally. Yeah. I always think it's helpful for founders to know. What we look for in our diligence and we're very transparent about what we look for and what our process is Starting with team so at pre seed and seed I will say team really is the number one thing and I think founders hear that a lot and some of them are kind of Like well, what about the team are you looking for?

[00:03:37] Caroline: Um, it really comes down to One, it's, it's, can we see ourselves working with the team for, you know, 10 years? It's almost like you're dating or married to this team because it's a long term relationship with them until. The business exits. so one, it's just that, like, is there that natural fit with us?

[00:03:58] Caroline: But two, it's do [00:04:00] we think the team can execute? Do they have a vision? And can they execute on that specific vision? Do we see signs of, um, it's little things like organization? is the founder responsive to our emails during the diligence process? Because all these little things are usually a sign of how, you know, The founder and the team operate long term.

[00:04:23] Caroline: And so we look for a lot of little signals. Like, is there any kind of arrogance that we are finding in the way that they're working with us? are they pressuring us to rush and get to a decision in like 2 to 3 days? We're just not really interested. In that, and we tend to see that that can cause problems down the road.

[00:04:43] Caroline: If the founder really wants to work with us, they'll give us the time that we need to complete the diligence on our end. So it's kind of all those little things when it comes to the team that we believe, Can kind of set the stage for how the relationship will go down the road Um additionally with [00:05:00] team we're always curious about advisors, especially at the early stage The while the team can be super strong There are always areas that people are lacking and that's where advisors come in and can kind of help the company And so we're curious about like who are the top two to three Advisors, what are they advising you on?

[00:05:20] Caroline: What are they helping you with? And then lastly, is there a board of directors? And sometimes that precedency there's not, but we do want to understand what are your plans to create 1, especially if you're doing, you know, a 1st priced round, that's usually when you would consider bringing on. You know, one of those investors as your, um, first board member.

[00:05:43] Caroline: And so just understanding plans to create a board of directors so that there's some fiduciary structure involved in the company going forward.

[00:05:52] Caroline: Yeah. Okay. So I have a number of questions. Uh, one is regarding, advisors. So, uh, some [00:06:00] startups, they put a lot of advisor names on their decks. Uh, what do you think about that? Uh, a lot of them might be not relevant. Yeah. I, I don't like when companies put a bunch of advisor names on their deck when they're not real advisors. It's a risk for the founder to do that. we do a number of back channel reference checks, which is like if we happen to know one of those advisors that you listed or somebody in our network knows one of them, we're always kind of.

[00:06:34] Caroline: Doing those back channel reference checks, reaching out to those people. If we have a connection to them and saying, Hey, you know, I saw you were listed as an advisor and so and so's deck would love to know more about your experience working with them. And this has actually happened to me before where the person has said, wow, I'm surprised that I'm listed.

[00:06:52] Caroline: You know, I've only talked with the company one time for 10 minutes. It's like, I'm not an advisor by any means. And I've been in [00:07:00] situations where that's happened and that really just. Puts a bad impression in my mind of the founder. It's almost like they're lying or stretching the truth on their deck. So I'd really advise founders to just actually have like two to three really close advisors that you work with and just list them.

[00:07:18] Caroline: You don't have to have a list of 20 advisors. That's not what it's about. It's. It's just about complementing the areas where you need some expertise.

[00:07:27] Rahul: yeah. And, Also assessing the team, right? You, you, you mentioned about, you know, little things like, arrogance. So, Founders are quite difficult to deal with, right? In general. So what is that line between arrogance and self confidence? And, and if you don't, if you're not really confident, if you don't have the conviction and courage, you don't end up starting a startup.

[00:07:50] Rahul: So what is the line there?

[00:07:53] Caroline: It's a good question and it's one that I still struggle with. It's, you want them to be confident but not be [00:08:00] arrogant and it, it can sometimes, that line can be blurred and that's where like, I try to involve more people than just myself. For example, I'll have somebody else on my team take a call.

[00:08:11] Caroline: With the founder to see if they're getting the same impression I'm getting. Cause it can be helpful to have more than one opinion on that. For that reason, it is kind of a blurry line. I think examples of confidence are more, you know, ability, ability to answer questions. Like I've had some founders where I send them a list of questions as part of my diligence and their, and their response is, Oh, hold on.

[00:08:36] Caroline: I've got to go talk to some of my advisors and my team to get answers to these questions. And. Really, the founder knows the company best, and I just want to hear their off the cuff answer of the questions. And so, that's an example of, I think, where a founder lacks some confidence in their ability to answer questions.

[00:08:53] Caroline: The arrogance comes out, I think, in different ways. Like one example that I gave previously was [00:09:00] when they're rushing you, oh, we've got all these commitments. You've got two days to give us an answer if you want to invest in our company. And that, that more is arrogance. Cause it's like, if you really think we can add value and you want us as investors in your company, you'd give us a week or give us the time that we need to make the decision.

[00:09:18] Caroline: And so that kind of like pressuring. Tactic, I think more comes from arrogance. Um, those are just a couple examples of how I can kind of decipher, but I agree with you. It's a really fine line between the two.

[00:09:32] Rahul: Yeah. And, in terms of their ability to execute, right? so, what do you look for? Like, what they have done in the past, in terms of like maybe education, qualification plus work experience or?

[00:09:44] Caroline: Yeah, a combination of what they've done in the past, talking with former employers of theirs to understand. How, you know, how they can execute when they're given something, do they take it and run with it? Do they need a [00:10:00] lot of help? Do they need a lot of guidance? Like it's a combination of reference checks, looking at what they've done in the past and just kind of in talking to founders, you can get a sense of whether they're going to need a lot of handholding or whether they are more of an executor.

[00:10:16] Caroline: If that makes sense. It's more. Again, I wish I had a clear answer, but it's more of those, like, it's more of an art than a science, more of those soft skills that you just kind of pick up on after a couple conversations. And we've certainly been wrong. I mean, there are some founders that I thought in diligence were.

[00:10:34] Caroline: Going to be executors and they've needed us to hold their hand every step of the way. And that's totally fine. That's what we're there for, but we do tend to see more success from the companies where the founders are the executors.

[00:10:49] Rahul: Yeah. Yeah. Yeah. So, I mean, one personal, kind of mental framework that I have is, you know, sign of a good founder is somebody who just needs a helping hand, not [00:11:00] like not expecting me to, really, you know, do things for them. That's a sign of a good founder, at least according to me. Yeah. And, also, what about, like the dynamics of working together and complimentary skills?

[00:11:13] Rahul: Like, how do you judge that?

[00:11:15] Caroline: You mean, how do we judge, like if we'll be a good match with the founder?

[00:11:20] Rahul: No, whether the team is, like, yeah, their ability to work together and have complementary skills, et cetera.

[00:11:26] Caroline: got you. Yeah. Good question. again, it's hard to tell. One thing that I do in my diligence is I always have a call with the key team members without the founder on the call.

[00:11:38] Caroline: So let's say there's 3 co founders and maybe there's like a CTO that also is, you know, at the executive level, but maybe not a co founder.

[00:11:49] Caroline: I would have a call with the The two other co founders, the non CEO and the CTO, like whoever, I guess, like the top, you know, three to four people [00:12:00] aside from the founder are, I get on a call with them and I kind of just see for 30 minutes, how do they interact when I ask them a question? How are they answering?

[00:12:11] Caroline: You can even just tell, like, is there one person that's dominating the conversation or are they all kind of bouncing things off of each other? And then I also ask them questions about what it's like working with the CEO and what are the strengths and weaknesses of the CEO, and do you trust the CEO and just all these types of questions and spending 30 minutes with the team without the CEO can be a really interesting way to gather that type of intel.

[00:12:37] Rahul: Yeah. And, I mean, you can have a skill, they can work together, but then there's also the question of motivation of like, you know, this is a hard journey, like whether they will go through that, like, how do you judge that?

[00:12:49] Caroline: How to judge motivation level. Um, uh, again, more of an art than a science. Usually, I will say the [00:13:00] fact that somebody is a founder of a startup, they generally are motivated. and you can kind of tell in asking them, like, what's your long term vision for the company? What do you see happening for an exit?

[00:13:11] Caroline: you can kind of get a sense of, like, whether they're in it for the long run and whether they're motivated and. 99 percent of the time. If somebody is like basically giving up their life to found a startup and dedicate 24 hours a day to their startup, they're usually pretty motivated. So I haven't had a lot of issues in the past with lack of motivation, but it's definitely something that we screen for.

[00:13:35] Rahul: Yeah. And, it does ownership, the percentage of ownership that the founders or the founding team has, play a role in, into the whole motivation equation.

[00:13:45] Caroline: Yes. Good question. It's something we care a lot about because I do think it plays into the motivation. We pass on companies often when we don't think the founder owns enough of the company. I recently looked at a company in [00:14:00] the last couple of weeks that I really liked what they were doing, loved their attraction, their business model, but the CEO who was actually a replacement of the original founder.

[00:14:12] Caroline: Um, but the person had less than 10 percent ownership. And for a seed stage company, it's just. That you're going to keep getting diluted and diluted or you're going to have to keep recapping to get more ownership and it just makes things really messy and so we look for more of the standard what I would call like a standard cap table at seed stage would be the founding team owns 70 percent or more of the company because at seed you've really only raised maybe one round if that usually you've just raised on safes so far. And so really 70 percent at the minimum is what the founding team should own to be properly incentivized with the company. So that's a big thing for us. And we unfortunately just pass because we've, we've made the mistake in the past and seen what can happen.[00:15:00]

[00:15:00] Caroline: Yeah. And also, you know, uh, uh, I was reading the deck that you've rated on this topic. and then you, you mentioned about Google searches and social media checks. Uh, so what are the red flags when, when, when you search for on Google? I usually don't find much to be honest, but I have one time in the past. And so I always just find that it's good to do a Google search, really just looking for. Mostly like, like, has, is there anything kind of criminal related that pops up on Google about the person? it's funny when you get like a very common name, like Alex Smith and like, it's very hard to decipher, you know, you get all these random things that and criminals.

[00:15:44] Caroline: but that's what I'm really looking for is just like major kind of personality, red flags, trouble that they've gotten into in the past that they're not disclosing. And same with social media, just making sure that they look like a well rounded, hard working [00:16:00] individual and that there's nothing kind of. I guess unexpected that would come up.

[00:16:05] Rahul: yeah, and, um, a couple of other things, that you have here is like, you know, the executive team was professional and organized through due diligence and the team was responsive to emails. So why do you think these are important to check?

[00:16:20] Caroline: Yeah. really just honestly from learning experiences and pattern recognition, like we've, when we look back at the over 100 deals that we've done in the past, we look back and we track all this stuff when we do diligence on the companies. And then over time we've seen. You know, these, this group is the top performing companies.

[00:16:42] Caroline: What characteristics did they have in common at the time that we did diligence? And one thing that we find is when they're not organized in diligence and when they're not responsive, you know, they maybe take a week to respond to. Questions, that that's just predictive of how the company is going to [00:17:00] perform down the road and how that founder is going to work with others down the road.

[00:17:03] Caroline: So. For us, it's really just, we've looked at a lot of data and we've seen that, like the highly responsive, highly communicative founders tend to be better performers. And I think that's just indicative of to run a successful business. You have to be organized, you have to be responsive, you have to be on top of your stuff and have everything put together.

[00:17:24] Caroline: And it, it goes along with having an organized data room. And I know it can be hard at. You know, seed and especially precede because you don't have that much to put in a data room, but still just having what you have in an organized fashion is better than having it be a mess. and I've had some founders. I ask, you know, can I get access to your data room? And they're like, well, I don't have one. Just tell me what you need. And then they're sending one off emails with all these different materials and different emails and everything just gets really convoluted. And so it's just easier to have. [00:18:00] A box folder or a doc send and have everything organized in folders.

[00:18:04] Caroline: And it makes it easier for the founder and the investor, in my opinion.

[00:18:09] Rahul: Yeah. And one last question around the team, one of the things that you look for is whether the team has exited. a business in the past. so why is this important?

[00:18:21] Caroline: Yeah, good question. So I will say for us, it's definitely not a deal breaker. It's not like we'll only invest. if the founder has a prior exit, certainly by no means, I actually think a lot of 1st time founders can be even more motivated than 2nd time or 3rd time founders, because they really want to get that exit under their belt.

[00:18:40] Caroline: So for us, that's more of just a documentation piece so that. In the future, we can look back and say, like, was there any correlation? Was there any difference in founders that had previous exits or didn't and how those companies, performed later on? So for us, it's more of just that having that data point, but I [00:19:00] actually personally don't really use that as a major judging point.

[00:19:04] Caroline: I actually think, like I said, Whether you're first time or second time founder, I think you can be equally as motivated to succeed.

[00:19:13] Rahul: generally people say this a success in the past is not a guarantee of success in the future. Uh, it's apparently proven in research then, but, but I see a lot of, VCs, back.

[00:19:24] Rahul: Second time and third time founders. Right. So often wonder why that is. So

[00:19:28] Caroline: Well, I think some, some VCs think that, and I agree with this, that there's a lot to learn the first time you found a company, I mean, you're learning from the ground up how to build a company. And so you do have a lot of learnings that you take with you to the second time, and so I do understand where that comes from, but I'm also those founders that are second time founders at one point, they were a first time founder and.

[00:19:54] Caroline: And so, yeah, in my opinion, I just think that that's not a huge, [00:20:00] differentiation or something that I look for, but I do see kind of both sides of it. and I, I think in particular, a lot of VCs will back a founder that they invested in the first time, like they'll back that same founder again. And it's.

[00:20:14] Caroline: It's less so because they've had an exit before and more so because they've gotten to know that founder for X number of years and seeing how they operate and how they execute. And maybe they really believe in that person. And so they're doubling down again. if that makes sense, what I'm saying, but, I think some VCs will back the same person twice and it's not necessarily because they've had an exit before.

[00:20:36] Rahul: I think uh, in, in financing in general, trust is everything. Right? So it's kind of probably trust that plays a big part there. Yeah. Yeah. So, when it comes to product, so what is the due diligence there like.

[00:20:52] Caroline: Yes, good question. So when it comes to diligence on the product, we're looking for a number of things and [00:21:00] again at pre seed and seed the product is usually early like at seed it's usually in market, but a lot of changes are still being made to the product and so What we're looking for is things like what, what's the near term product development plan.

[00:21:15] Caroline: So over the next 6 to 12 months, what are the key features or key implementations that are going to be happening? And what's the timing of those? So we can get a sense of, like, in the next year, the products going from here to here, we want to understand. And I don't know if other VCs care about this, but at Vitalize, for us, data science is important.

[00:21:37] Caroline: We think companies that are successful in the long run, they have some kind of, like, proprietary way that they use data or leverage data. And so. As part of the product, we want to understand what data are you gathering through your software? And what what are you able to do with that in a unique way that others can't do or aren't doing?

[00:21:59] Caroline: so [00:22:00] it's, you know, development plan. How are they using data? How does like the pricing and revenue model, how is that structured? How do you plan on making money from this product? and then I always ask for a like three to five minute recorded product demo. Personally, I just find it very helpful to actually see how the product works.

[00:22:20] Caroline: And so I always encourage founders to include that in their data room. Cause just including screenshots and a deck can be very hard for. Not just an investor, but anyone to understand how the product actually works and seeing a demo is super, super helpful. and then the last thing when it comes to product that I like to do is we have a technical advisor, who we always go to.

[00:22:45] Caroline: And we ask him to look at the company's tech stack because. I'll be honest, I'm no technical expert at all. And so it really helps me to send to kind of a 3rd party and just get a sense of, like, what's unique on the back end with the product. Is it [00:23:00] structurally sound? is it set up in a way that as they scale?

[00:23:04] Caroline: You know, the product will be able to scale or will it have to be completely rebuilt because it's not set up properly. So the technical aspect, I think, is also important. So hopefully that helps. That's kind of the different sections I think about within product.

[00:23:20] Rahul: Yeah. so there's this question, around mode that investors ask, right? You know, what if Google decides to win this? So does it make sense to also think about, you know, what could be the differentiation? If not now, but in future, like, so, so you have this, Hamilton Helmer seven power frameworks that, everybody uses in terms of what could be the differentiation.

[00:23:41] Rahul: Does it make sense to think about this at this point or?

[00:23:46] Caroline: Totally. Yeah, you got a step ahead of me. I, uh, I usually think about that in terms of the competitive landscape. But regardless, yes, super important. I always ask the founder. What is your [00:24:00] primary differentiator? Because I do a pretty deep dive on the competitive landscape. Usually I've. I find who I think the top like four to five competitors are.

[00:24:10] Caroline: And then I really understand what those products are. And then the primary thing I want to know from the founder is what are you doing differently? What will keep you ahead of these others? What's your advantage. And there has to be some kind of unique proprietary thing that, that the company has that others don't or others couldn't create.

[00:24:30] Caroline: I think that's super important.

[00:24:31] Rahul: Yeah, so this is something that I would love to know, you know, how do you look for competitors? So let's say a starter comes to you for due diligence. Yeah. What is your research or, you know, how do you go about finding competitors? So one of the things that I've done is that, you know, there's this tool, I can't remember the name of the tool.

[00:24:50] Rahul: So what it does is that it basically searches for, similar websites, reading the, the, the words on, on, on the product. I mean, [00:25:00] the company website, it finds similar. So that was one way of finding competitors. Is there any interesting ways you can find competitors?

[00:25:07] Caroline: Well, I would love that. You'll have to tell me the name of that later so that I can look it up. I'm always looking for ways to automate our diligence and use AI to kind of help with it. To be honest with you, I'm more old school right now and do it a bit more manually where I go to PitchBook and CrunchBase and I search the company name and they'll list out like all similar companies in order of like most similar to least similar and that's kind of my start starting point.

[00:25:35] Caroline: And then, honestly, just Googling, like, let's say I'm looking at a, I don't know, platform for, we invested in a, platform that automates finances for freelancers, so I'll just Google finance, tools that automate finances for freelancers, and you'd be surprised how much We'll come up in a search like that.

[00:25:55] Caroline: And oftentimes I find competitors that aren't listed in the company's deck [00:26:00] as competitors, and that's to be expected. They can't list every single possible competitor. but I, it is important for us as investors to do our own competitive diligence than rather than just relying on, you know, what the company lists in their deck, because there's always others that pop up and.

[00:26:16] Caroline: And so that's, yeah, it's very manual for me, but, would love, would love to know the tool that, that you had heard of, if you can tell me after,

[00:26:24] Caroline: Yeah, sure. yeah. Uh, let me think about that. Plus, you know, uh, but there's also this, right? Uh, founders don't have paid subscriptions to PitchBook and CrunchBase and all those. So how can they find, it's just about Googling,they should just know what's out there from like customer conversations. Usually that's how I think founders find out about their top competitors is they're talking with a potential customer and. The founder should ask like, what other tools were you considering in your search?

[00:26:56] Caroline: And you know, that's how you can kind of learn about at least the [00:27:00] closest ones to you. So I think a lot of it is just the founder being in the weeds in the business. I'm sure they've come across most of the competitors and otherwise just Googling should, should get them what they need.

[00:27:12] Rahul: Yeah. And what if you find a competitor that, you know, their founding team is not, the startup is not aware of? Is that a red flag?

[00:27:22] Caroline: It's happened before to me and it's only a red flag if it's like a really, you know, direct competitor. There was one time where I was really shocked that the company hadn't heard of this one because it was so so similar and selling to the same target audience. And in that case, I just could not comprehend why they hadn't heard of it when this is what they do for a living.

[00:27:46] Caroline: They should know that. Um, but there's always going to be. Indirect competitors that are doing something kind of similar. That's not the exact same that I don't expect founders to know hundreds of companies [00:28:00] or every single thing that's out there, if that makes sense.

[00:28:03] Rahul: Yeah. And, you know, one last thing around product, one of the things that I found difficult was pricing. So, well, like if the pricing is really off, or, you know, if you see that, the startup is not really, So some startups don't monetize data in the beginning. So if there are some red flags like that, you know, what are those?

[00:28:25] Rahul: That's a good question. I rarely find red flags about pricing at the early stage. Cause it's all about trial and error. So I tend to trust that the company knows what they're doing with that and that they're trying different, like let's say revenue is decreasing or. They're not getting the traction that they expected within a certain customer base.

[00:28:47] Caroline: Like I always expect that the founder is kind of testing different pricing and figuring that out. And that's just the nature of the early stage. So I don't really, to be honest with you, yes, I want to [00:29:00] know what their pricing is and yes, I want to know how it's working for them and what they're doing if it's not working.

[00:29:06] Caroline: But I'm not like really making a ton of judgment calls about the pricing because I just know that at this early stage, the pricing is bound to change and they're going to figure it out and they're going to adjust. so I don't really have like a, a major red flag I look for with pricing. it's more just, I want to understand how the founder is thinking about it so far.

[00:29:28] Rahul: Okay. So what if the founder is missing,like a source of revenue, like it could be like monetizing the data or something else that is so obvious to you, but, there is no vision from a founder side on, on such a thing. What do you think about such a scenario?

[00:29:44] Caroline: Yeah. I think that would be, a red flag if they hadn't thought of something and weren't open to something but It's rare that I come across that i've i've had situations where I mention. Hey, have you thought about monetizing this [00:30:00] way? And the founder is like, oh, yeah, like definitely have thought about that Here's x y and z reason why we're not doing it right now but we're gonna do it in the future and like usually they have a really thought out answer about it, but it would be a red flag to me if like they had never thought about it, didn't, you know, wasn't open to looking into it type of thing.

[00:30:22] Caroline: Um, but I would say for the most part, the founders know more about their business than I know about their business. And so it is pretty rare that I would have some vision or idea like that, that they didn't already think of.

[00:30:34] Rahul: Yeah. moving on from product, the other thing, is the, the market sizing. Right. So. How to do this? So, um, you know, the consultants, they use this market sizing generally to come up with the rough market size. Is that the way to do it? Or, is there other ways to do market sizing?

[00:30:57] Caroline: Personally, [00:31:00] I, I have an issue with a lot of with the way that most founders do market sizing and here's why what I see in most found early stage founders decks is let's say that they're going at. Um, let's say they're like, I don't know, a health tech product, just random example. What I see founders doing is just.

[00:31:24] Caroline: Saying, okay, here's the health care market in the US and it's like 500 billion dollars or whatever and they're doing very much like a top down just Googling the entire market size. And I just find it to be so inaccurate that it's almost frustrating that it's even included at all. What I much prefer and what I do on my own side anyways, my own diligence is I do a very much bottoms up market sizing.

[00:31:50] Caroline: So what I do is I take the selling price of the product and then I, I try to really understand who they're selling to more [00:32:00] specifically rather than more broadly. So like if they're Targeting, you know, businesses with 100 to 500 employees, just random example, I'm going to do a bunch of research on how many businesses in the U.

[00:32:15] Caroline: S. well, let's say it's. Software businesses in the US with 100 to 500 employees. We want to get as granular as we can. So I'm going to do research on how many of those companies there are in the US. Find a reliable source and get that number and then multiply that by the annual Selling price or the average contract value, whatever information I have from the company and that's how I can get more of it.

[00:32:42] Caroline: Like an accurate bottoms up market sizing of their specific target market, rather than like the entire, you know, healthcare market or whatever it is. and it's usually a lot smaller, but it's what I'm looking for is that it's greater than a billion dollars because I want it to be. Big enough [00:33:00] that there can be competitors and multiple competitors can be successful in the space.

[00:33:04] Caroline: I want to know that the space is growing and so we'll typically pass on a deal if we can only calculate like a 500 or 600 million dollar market size, we're really looking for that billion plus, and we really want to do the bottoms up analysis to make sure that we're able to calculate that. And so I wish more founders would do it that way in their decks.

[00:33:26] Caroline: I just feel like so many do this, like, giant number, this just like blanket number. Um, so founders who are listening, I think investors would appreciate that, but that's just my two cents.

[00:33:38] Rahul: Yeah. So, I mean, you mentioned about, the market size being small, less than a billion dollar than you would pass, but there are these,large outcomes that has happened, in the history of, you know, venture investment that started off with very, really small market. But then there, there were these address in markets that made it really big.

[00:33:57] Caroline: Right? So how can you, you know, think of [00:34:00] those, what could this more be like on top of what they're already doing? yeah, I think there are always exceptions to it and part of it is having that vision as an investor of whether that space is going to take off in the next couple years and a lot of it is about timing because really you have kind of a 7 to 10 year horizon from when you invest in a company until when you need it to exit so that you can return that fund to your LPs and so a lot of it is like, you know, Maybe the market's small now, but do I think it's going to explode within the next 5 to 7 years, 10 max?

[00:34:40] Caroline: it's kind of having that vision as the investor, but if you think it's going to explode in 20 years, but not within 10, then, you know, the timing may not be right to invest in that space right now. So it's a combination of timing. The pace of growth of that market and just [00:35:00] doing the market sizing to see if you think it's big enough.

[00:35:03] Caroline: Now as well. So it's kind of those three things.

[00:35:06]

[00:35:07] Rahul: yeah, beyond the market, one of the other categories that you look for is the growth. I mean, the sales and the marketing side of things, right? So, uh, yeah. What is a due diligence there? Like, are you just looking at, you know, they have a clear go to market strategy. and like, what are some of the red flags there?

[00:35:24] Caroline: Yeah. So we look at, you know, go to market and sales and marketing what the company is doing. I, it really depends on the stage of the company. I think like at pre seed, it's very different even than seed because pre seed, a lot of those companies are pre revenue. They're still finalizing their product.

[00:35:43] Caroline: Really? They haven't even shipped the product. and so go to market while it might be in the back of their minds. It has yet to be tested. And so for that, I'm looking for more of just how is the founder thinking about what they're going to do? Do they have a clear plan [00:36:00] for when? They do launch the product, how they're going to go to market and have, they run that by advisors.

[00:36:07] Caroline: What like kind of early testing have they done on that thesis? So that's what I'm more looking for at pre seed at seed. If they're already in market with the product, I'm looking for what are kind of their top two to three strategies. Are they doing cold outreach? Are they doing, are they spending something on marketing?

[00:36:25] Caroline: Are they hiring us, you know, building their first sales team and having. Account executives that are out there selling are they going to conferences? Are they doing content generation? Like there's a number of different approaches channel partnerships. There's so many different approaches that companies can take.

[00:36:43] Caroline: I'm really looking for. What are the top 2 to 3? What's working? What have they tested that isn't working and kind of what is their go forward plan? So any data that they can share around that is helpful as well as what does their sales [00:37:00] pipeline look like, um, you know, what, what dollar amount really is in, like, the late stage pipeline of customers that they think are likely to close.

[00:37:10] Caroline: so we can get a sense of what future revenue will look like, and then. Have they had any churn? I'm always curious of. Even if churn is low, but you've had a couple customers churn, why did they churn? I'm always, like, I'm always asking. What reason did that customer give for why they are no longer working with you?

[00:37:29] Caroline: And that gives a lot of Intel about the product itself too. So when it comes to go to market, I guess I would say it's about what, what have you tested? What are you doing? What's working? Have you kind of found a sales motion that is working for you? And if not, what are you doing to address that?

[00:37:46] Rahul: Yeah, and red flags, some of the red flags would be a high churn rate. But, but then again, if you're targeting SMB, the high churn rate is like a given, right? So, and it could be because of [00:38:00] reasons that is not direct. I mean, because of the product that you're selling.

[00:38:06] Caroline: I still think high churn rate is a red flag. Because even if you're targeting SMBs and maybe they churn for other reasons, then are you going after the right customer segment because high churn can, can cause a lot of other issues for a company. So that's definitely one of the main red flags I would look for and would really want to understand what they're doing to address the high churn and to improve it.

[00:38:29] Caroline: other red flags would be like, honestly, just sometimes, um,

[00:38:37] Rahul: costs.

[00:38:38] Caroline: yeah, high customer acquisition cost, but that's also so influx at the early stage, like that's, and a lot of early stage companies aren't doing any marketing whatsoever, no paid marketing. And so that can even be hard to calculate at the early stage, but more so a red flag would be just a founder, not.

[00:38:58] Caroline: Not really having an [00:39:00] answer about go to market.

[00:39:01] Caroline: Like I've, you'd be surprised. I've talked with founders who I say, what's your go to market strategy? What's working for you. And they just say, Oh, you know, I'm just. Doing direct calls and that's it. I'm sending cold emails and we'll see how it works, you know, just vague answers.

[00:39:17] Caroline: Like they have no real plan around it. And I see that leading to problems down the road when it goes back to like the whole organization thing. If a founder is organized, they'll have a clear plan and a clear path forward when it comes to go to market.

[00:39:34] Rahul: Just curious, what would be a good answer if, if you were to ask a founder?

[00:39:39] Caroline: A good answer for go to market is just, um, Here are the three things we're doing. We're doing, cold email, we're doing content generation and we've generated, you know, we've developed this community of X amount of people that are following us because of our content generation. And that's led to this [00:40:00] many customers.

[00:40:01] Caroline: And then, you know, number three, we're doing, we're testing out some paid marketing. We're doing some Facebook and Google ads. And this is how that's gone so far. Like, I guess a good answer is regardless of the strategies that you're testing, how are they working? What have they led? What outcome have they led to number of customers?

[00:40:22] Caroline: What has the churn looked like as a result of that? And so it's, it's really just, yeah, that you're. You're trying things and you know how it's working and you know how you're going to adjust

[00:40:32] Rahul: Yeah. So, besides these, what are the other categories, of, diligence process?

[00:40:38] Caroline: so financials are a big one I know some some people have said to me in the past like what like do financials really matter at the early stage? And in my opinion, they're One of the biggest parts of diligence. They're one of my, it's one of my main focuses is the financials. And here's why, um, let's start with the balance sheet.

[00:40:59] Caroline: [00:41:00] So I've, you'd be surprised how much I've found like a lot of debt on some early stage companies, balance sheets. And that's a red flag to your question about red flags, because. It can be hard for a company to get to that next round of funding and raise that next round and get to that next stage if they have a lot of debt.

[00:41:20] Caroline: And I don't mean, like, having raised a couple convertible notes or safes, but I mean, I've seen companies with, like, 500, 000 of credit card payments that they owe and, like, That's just not normal for a seed stage company. So it's things like that, that concern me. Um, other concerns about liabilities would be large amounts of accounts payable that the company for whatever reason owes, but isn't paying.

[00:41:49] Caroline: so I do an in depth look at the balance sheet and ask kind of line by line questions. What's this? What's this? What's this? just so I have the clear picture of that. And [00:42:00] then when it comes to the PNL, on the other hand, for me, what's really important is 2 things, revenue growth. And I say that because how I mentioned that we've analyzed those, over 100 companies that we've invested in the, in the past and how they're doing now.

[00:42:17] Caroline: One of the main drivers that always comes up in this analysis is the companies that are doing really well today. They had strong revenue growth rates even when they barely had revenue, like even in the really early stage when we were diligencing them. It just tends to be a sign of how their revenue is going to grow later on.

[00:42:37] Caroline: And others might disagree with this, but I've just seen in my data. That that tends to correlate and so I look for like more than 15 percent month over month growth More than 100 the company should be doubling revenue every year. So more than 100 year over year growth even at the really early stages and it's not that we won't invest if it's not the [00:43:00] case It's just these are definitely some signs that we look for and then the other thing is runway, in the, in my analysis, I've also found that companies that wait to raise until they're almost out of money.

[00:43:13] Caroline: They tend to be less successful later on. And it could, it could go back to, like, maybe that founder isn't organized. And so they waited until they had. You know, 2 months of runway to raise, but it all kind of comes together and, and leads to them being less successful later on. And so I look for companies to have more than 6 months of runway.

[00:43:36] Caroline: Um, that's just kind of a, yeah, a data point that I look for. So those are some examples of what we're looking for with financials and then. Um, one last thing on that is financial projections. Um, we're not looking for like super detailed financial projections, but we just want to know how you're thinking about things.

[00:43:56] Caroline: So, Maybe the next three years annual [00:44:00] projections to see how you're thinking of growing the team how you're thinking revenue is going to grow All of kind of the details that go into the model that lead to the output I'm, just curious to see how a founder is thinking through all of it

[00:44:13] Rahul: Yeah. And in terms of projections, what are some of the, you know, the thinking which is wrong? Like, I mean, red flag for you.

[00:44:23] Caroline: Yeah, I don't think there's like wrong. Not enough growth, too much growth. I see a lot of companies saying, you know, in three years, they're going to be at a hundred million in revenue and it's just not true. so it's more just things like that. Like, are they way off? Are they way off the charts in terms of how they're thinking about things?

[00:44:43] Caroline: Are they not realistic? Um, yeah, no particular red flags, I guess.

[00:44:49] Caroline: Um, looking even at things like salaries in their model is important to make sure that a founder isn't gonna go from, you know, pre seed to seed and all of a [00:45:00] sudden take like a crazy high salary, just little things like that. It's like. Going through the model in detail gives me a sense of like how the founder is planning for the future.

[00:45:09] Caroline: So there's not one particular red flag. It's more looking at the whole picture and understanding how they plan to grow the business. And just do, I think it's like in general, reasonable or not.

[00:45:20] Caroline: Yeah. Uh, and, and besides this, what else, becomes, I mean, in terms of due diligence, A couple other, a couple other sections. I'd love to highlight that I look at, we, we do kind of an exit analysis. And this isn't really, like, founders don't really need to know, I guess, all the detail that goes into the exit analysis, but it's helpful for founders to know why we do it. Um, as I mentioned, you know, we have a duty for LPs to make a return on the investments.

[00:45:54] Caroline: And so the exit analysis basically says. If we invest X amount in this deal at [00:46:00] these terms, here's what we'll own of the company. And that ownership, we make some assumptions. Okay, let's say the series, let's say the company raises a Series A at this amount, then a Series B, then a Series C, and so on. And maybe they exit after Series C.

[00:46:17] Caroline: In seven years from now, and here's what our ownership will be then after getting diluted through these other rounds. And then if we, we look at, comparable transactions, so I go on to pitch book and I see what acquisitions have happened in the space, what IPOs have happened, and what the revenue multiples have looked like at the time of exit.

[00:46:38] Caroline: And then we make some assumptions about that and say, okay, here's our. Ownership at the time of exit. Here's what we think the company will exit for. And so here's how much we'll ultimately return from this investment. And so that's a big part of our diligence is just kind of, and a lot of assumptions go into it, like I said, but [00:47:00] what do we ultimately think we could return from this investment?

[00:47:03] Caroline: And that helps us assess whether it's worth the risk or not. Any questions on, on the exit piece?

[00:47:11] Rahul: Um, not really, so I, I've seen this,because, you know, Bessemer Venture Partners, uh, they make the, their investment memos public. so I've seen this, uh, it's, it's very interesting how they, they think about how much they could. Um, yeah. And, and what about the, the key deal terms, uh, and also any other things that, becomes part of diligence.

[00:47:39] Caroline: So for deal terms, it's definitely varies by VC. So I'm not speaking on behalf of all VCs. I think a number of VCs have target ownership percentages, like they need to own 5 percent or they need to own 10 percent of the company because that's part of their overall thesis and strategy for us [00:48:00] as a smaller fund that vitalize.

[00:48:02] Caroline: It would be hard for us to, you know, get 10 percent every time we invest. We don't, and we don't write large enough check sizes to do that. So we're not really driven by ownership percent. What we. Are driven by when it comes to deal terms is are they reasonable? Do they make sense for where the company is at today?

[00:48:22] Caroline: So just from seeing so many companies day to day and what what's normal in market for like a revenue multiple of of. What your revenue is and what valuation you're raising on. we just kind of know what's normal and what's not. And so if a valuation is, you know, we've passed on companies that are pre revenue raising on a 30 million valuation, we've also invested in those companies and have seen it not go as well.

[00:48:47] Caroline: And so we've learned that like capital efficiency is important and founders that raise on fair terms. We tend to prefer working with those founders because they're not trying to. Raise [00:49:00] on crazy high valuations, which can ultimately set them up to take a down round the next round if they don't hit certain revenue milestones.

[00:49:06] Caroline: So I'm just in my experience seeing how that can go. And so we're looking for, you know, fair terms, reasonable valuation. Um, we require things like information rights and pro rata rights. I think every fund has kind of their own. Requirements and things that they look for, but we tend to keep things pretty standard.

[00:49:26] Caroline: And as long as everything kind of fits within that, like standard box, then that's what we would be generally looking for.

[00:49:33] Rahul: Yeah. And, what about, uh, the next milestones? I, you mentioned, uh, you know, the short runway from a founder as a red flag, but, what about the next milestone? How do you assess that?

[00:49:48] Caroline: Yeah. In terms of milestones, if I'm understanding you correctly, um, we, so one question I always ask founders and diligence is like, what three [00:50:00] milestones are you going to use this funding to achieve? And what I'm looking for is. You know, I'm going to hit, I'm going to use this money to hit 1 million in ARR, and I'm going to acquire this many customers and do this, this, and this, and then I'll be able to raise my series A.

[00:50:17] Caroline: And what I'm looking for then after I invest is to really hold the founder accountable to that and help them hit those milestones so that they can raise that next round and get to that next level. so when it comes to diligencing and asking about the milestones, I want to make sure they're realistic.

[00:50:33] Caroline: I want to make sure the founder has a clear plan To hit them and that it's not just some made up number that they actually Can you know acquire that many customers and get to that revenue? And so that's really what i'm looking for is the path to how they're going to hit those

[00:50:47] Rahul: Yeah. and in your, you talked about, uh, talking to, you know, customers, team members and things like that. Right. And,most of the time the team [00:51:00] would give you like reference, uh, person, like customers or advisors, or other, other team members. But then, you know, I've had a lot of founders, you know, called me up and say, you know, say this when my investor calls you, like when I'm the customer for, for, for a particular, startup.

[00:51:18] Rahul: So, is there any point in talking to, uh, you know, the contacts that, that's given by the founding team to you?

[00:51:26] Caroline: Yes, i'm glad you brought this up so this is the Like last part of our diligence process. And what I think is actually the most important is references. I think of references in two buckets. So one is the references that the founder gives you. And I do think those are important. And I always talk with those people.

[00:51:46] Caroline: And for that bucket, it's really, it's customers, key employees, maybe a board member or, you know, key investor, like the lead investor I'd always want to talk to. so customers, [00:52:00] employees, board members, investors, those are typically the buckets that a founder will introduce you to. And I always talk to them.

[00:52:09] Caroline: I always like to get, and of course they're going to say positive things, but it's still, you never know what might come up and it's good to get that positive feedback as well. Um, the second bucket though, is what I call back channel references. And these are where I place most of my Effort. And most of the importance is on these.

[00:52:27] Caroline: and what the back channel references are is reaching out to people that, you know, where I start honestly is LinkedIn and I see who I'm mutually connected to with the founder. And I reach out to friends of mine and say, Hey, I see you're connected with this founder. You know, I'm evaluating his company or her, her company for potential investment.

[00:52:47] Caroline: Can you tell me your experience with this person? And I get really interesting intel from that because sometimes. And it's usually very, um, consistent, like a number of people I reach [00:53:00] out to. They're all saying that they have had mixed experiences or they're not raving about the person. And so then that's kind of a clear signal to me to probably pass on the deal.

[00:53:10] Caroline: But more often than not, like all of the back channel references are raving about the person. They're amazing. I've, I've worked with them here or there and, and blah, blah, blah. but in addition to doing back channels on the founder, you can also do them on. The co founders on other employees on, you know, like I mentioned in the beginning, if you're connected with one of the advisors, they've listed in their deck doing that is helpful as well.

[00:53:36] Caroline: and you can just get really interesting Intel that way. Um, in addition to back channel references, I also reach out to a number of external. Folks as part of my diligence process, one of which is we at Vitalize have a future of work advisory board. And so this is made up of, I think about 20 to 30, um, HR executives.

[00:53:59] Caroline: And a lot [00:54:00] of the deals that we look at are, they sell into HR. And so it's really helpful to get intel from executives that have been in HR for 20, 30 years. And understand like, are you buying this type of software right now? Is this something you would ever buy? What do you see are the pros and cons of this?

[00:54:18] Caroline: And so we have different advisory groups that we go to for, um, advice on every time we're doing diligence on a deal. And then I mentioned, I also send deals to my technical advisor. And so these are kind of all a number of steps that go into that, like back channel process.

[00:54:36] Rahul: Yeah. You know, the one person, that I've heard, uh, or in the media, I don't know him personally, is about Lee Fixel. so he used to run Tiger in the past. He has a different fund called Addition. So he invested a lot in India. And, I've heard many founders say that, you know, when he comes to meet with them, it's like he knows more about the business than the founder himself.

[00:54:58] Rahul: and one of the things that he [00:55:00] does is that instead of just talking to employees, he talks to ex employees and things like that. It's insane apparently the diligence process that that they had back then.

[00:55:11] Caroline: Yeah, that's interesting

[00:55:13] Rahul: Yeah, and Curious to know like when does the diligence process begin in terms of the investment?

[00:55:21] Rahul: Startups interacting with you to raise funds. So when does the diligence process begin? And also roughly how long does it take?

[00:55:31] Caroline: Yeah, so for us at pre seed and seed, um, before we would start diligence, and then we can finish in a week if we have everything we need from the founder. Like, if they have that organized data room that I mentioned and everything's in there, we can finish in a week.

[00:55:48] Caroline: It is a little, it becomes a little bit difficult with doing the references because you need to give people time to get back to you and set up a quick phone call and whatnot. And so usually I will say, Okay. The end to [00:56:00] end process tends to be more like two weeks, including the references, but I still think that that's pretty streamlined.

[00:56:06] Caroline: and then we also have an angel community that invests at pre seed, and the angel community does tend to take a little longer because you're gathering individual commitments from a number of angels, and so our angel process is more like three to four weeks end to end. But for our fund, it's more that one to two week process.

[00:56:25] Caroline: If we have all the materials,

[00:56:27] Rahul: And, um, offering the term sheet would be after, before, like when, when, when does that happen?

[00:56:35] Caroline: that's a great question. So we in particular don't generally lead rounds, so we wouldn't be the ones issuing the term sheet. we are like a 500 K check, you know, second, third check in after there's already a lead investor in place. And so for us. Typically as part of our diligence, they already have a term sheet and we're reviewing the term sheet and we prefer that there's a larger investor that's already set the [00:57:00] terms and so that's one of the reasons too that we can move more quickly because a lot of times that lead investor has already done deep diligence.

[00:57:07] Caroline: and we like to be conscious of founders time where we're willing to just use reference check notes that the lead invest, if the lead investor has already performed like customer calls and whatnot, we don't want to duplicate efforts. We'll just use their notes to streamline. And so in that case, we can be done even faster.

[00:57:24] Caroline: But if we're diligencing before there's a lead investor. Then we would kind of finish our diligence, help them find a lead investor, wait for them to find a lead investor before we would finalize our decision.

[00:57:37] Rahul: Yeah. And, you know, you talked about, uh, some founders sometimes putting, doing pressure tactics. Like, you know, asking you to make, forcing you to, trying to force you to make a decision quickly and things like that. So, has there been a scenario where you've compromised on DD, due diligence, Or maybe the market is in such a state that you had to make a [00:58:00] decision quickly.

[00:58:01] Rahul: Has there been such a situation?

[00:58:02] Caroline: Yes, there have been a number of these and to be honest with you, none of them have turned out well. like looking back and I'd have to double check, but every deal that I can remember that we've rushed through because we've been pressured, those companies aren't doing well compared to other companies.

[00:58:18] Caroline: And so, I don't know if that goes back to the, like, arrogance thing that we talked about, but... The founders that give us the time we need that really want to work with us because of the value that we bring them. Those are the ones I think that tend to be more successful. And so we've really learned the hard way, not to get pressured into the rush.

[00:58:38] Rahul: Yeah. And so, other than this, like what are some of the other challenges, on, doing diligence on pre C? Because there's very limited data. Yeah.

[00:58:49] Caroline: Yeah, I think that's it right there. The challenge is when there's limited data, it's hard to evaluate an opportunity. And I think it goes back to the founders [00:59:00] should have. Even with limited data, they should have an organized data room. They should have some level of data, even if it's like there's no product, they should have done, you know, customer, um, customer calls to like understand the pain points of who they'll be targeting and.

[00:59:21] Caroline: They should have done surveys research. Like there should be some level of data, even at the very early stage. And so I think a pain point for me in diligence is when a founder says, like, I don't have any data I'm too early for that. Like there should still be some, something put together that we can evaluate, otherwise there's nothing for us to evaluate.

[00:59:41] Caroline: Um, so that can be a pain point in diligence. And like I said, I think my biggest pet peeve is just the. The lack of organization, when there's no data room and it's one off emails of here's this file, here's this file. And it's hard for me to, to keep it all together and, and organize it when the founder is not organized.

[00:59:59] Rahul: [01:00:00] Yeah, so your advice to founders would be, have a data room, have it really organized well, have as much data and clear answers to your business and everything around it as much as possible. Anything else?

[01:00:13] Caroline: Yeah. I think the ones you said have a data room, be organized, be. Just be yourself. be kind, responsive to emails, like be confident without being arrogant. Just, I think, um, I think where founders can sometimes go wrong is overthinking everything. And oh my God, I, I have to get input from all these people before I can get back to this investor.

[01:00:41] Caroline: Like, I just want your, your real true answer from you, the founder of, of what your plan is and your vision. Like, I don't. I think it's great that you want to get advice, but I think sometimes founders, the overthinking of everything the investor is asking for can lead almost to, a [01:01:00] bad outcome. I think just be yourself, be confident, you know, the business that you're building more than anyone else does and yeah, just have everything organized.

[01:01:09] Caroline: That's my number one tip.

[01:01:10] Rahul: Yeah. And, uh, how many red flags would lead to like, you know, a failure, of due diligence

[01:01:18] Rahul:

[01:01:18] Caroline: don't, I really don't think it's a set number. I think it depends on the severity of the red flag. So offense. if there's something what I would consider a severe red flag would be some major like debt on the balance sheet or the founders don't own enough of the company. Like I'll just pass before I even go further and diligence because I don't want to waste the founders time if there's like what I would call a big red flag.

[01:01:42] Caroline: if it's a small red flag, I think things can be overlooked as long as there's not like five small red flags. Do you know what I mean? If there's. If there's like a high churn rate, and that's the only thing wrong that I can find wrong with the company, um, and they have a [01:02:00] reasonable explanation for why there was churn and why there won't be churn going forward.

[01:02:04] Caroline: Like, just as an example, I think a limited number of small red flags is certainly doable. But if, if it's a large number of small red flags, and they're kind of piling up one after another, that's where it wouldn't really make sense to move forward any longer.

[01:02:20] Rahul: yeah. And, um, How do you guys use this, diligence report internally?

[01:02:27] Caroline: Oh, good question. Yeah, I've seen this done so many different ways. So. We're big personally on process. And so for us, it's really, and I run our diligence. And for me, the reason I do the whole diligence memo is because I don't want to miss anything in my diligence. It's not because I have to have this memo done and it's going out to all these people.

[01:02:50] Caroline: It's not, it's just for us internally. And it's for me to make sure I don't miss any steps in my diligence. That said, it's also helpful for VCs to have a tight. [01:03:00] Process for when we're fundraising from LPs, you know, they want to see examples of our diligence memo. And so, it's just for a number of reasons.

[01:03:10] Caroline: It's good to have an organized standardized process 1. so we don't miss anything. Two, so we can share it with LPs. Three, so we can document our whole process. Let's say something goes wrong with the company three years from now. We can go back to our well organized diligence report and say how did we miss that or where did we talk about that thing.

[01:03:32] Caroline: so those are kind of the three main reasons why we have the organized diligence memo and it's just saved internally in a box folder so that we can go back to it if we ever need it. But it's not, it's not really shared ever. I will say the one time that I do share diligence is I tend to be a more collaborative investor with other investors.

[01:03:54] Caroline: And so if somebody else is looking at the same company, I don't want them to have to repeat all the same [01:04:00] work. So I always offer to share my diligence report with other investors who are looking at the same opportunity. and I asked that they don't share it. with anyone else that they keep everything confidential.

[01:04:11] Caroline: But that's the one scenario where I would share my diligence memo.

[01:04:14] Rahul: Yeah. You know, one last question before we end. You know, you shared your diligence process in great detail. So, uh, are you afraid, that, you know, founders would listen to this and then, you know, try to gain the whole process and to make sure that they pass the diligence, especially with you?

[01:04:36] Caroline: Yeah, I like this question. I honestly just want to be helpful to founders. I think that sharing the detailed process that we run can only help founders be better prepared. And at the end of the day, I don't think they can game the system because their numbers are what they are. Like their revenue growth is what it is.

[01:04:55] Caroline: They can't. They can't, they shouldn't and can't lie and change the [01:05:00] numbers like they are what they are and the data is what it is for their company. So I think what I've shared today can only help founders be more prepared. and I would hope that nobody would try to game the system. I think most founders are, that I've come across are pretty trustworthy and honest, and hopefully they find this helpful.

[01:05:19] Rahul: Yeah, this was great. Thank you so much for taking the time to do this.

[01:05:25] Caroline: Thank you for having me. It was great to be here. I appreciate it.