For people interested in working in the private equity business and especially in venture capital, I believe it is important to prepare through education and experience. However, it is imperative to keep five things in mind if working for a venture fund.

1. Never trust what the entrepreneur says
The companies pitching their deals always paint the most attractive picture about themselves. However, that does not mean that it is the real scenario. The onus falls on the due diligence team to verify the facts and assumptions given by the company.

2. The management team has utmost importance in valuing a deal
It is just not sufficient to have a great idea; however it is essential to have a great salesman as well to sell that idea. The management team should be efficient in running their operations, managing their financing and selling their product. There are many good ideas out there, however there are very few efficient management teams who are able to survive the challenges and make their ideas successful. Thus, it can be concluded that "Invest in people, just not the ideas".

3. Does the company actually address a pain in the market?
With all said and done, and you are impressed with the team's pitch and their idea, it is important for the due diligence team to take a step back and evaluate what exactly is the company addressing to do. Is there a NEED for the company's product? This point does overlap with the first point; however it is important to stress the importance of understanding what the company intends to do before going any further.

4. Never invest in service based companies
Service based companies usually offer services as their product which cannot be scalable with great profits in the 5-7 years' time cycle. Venture funds look to generate high returns and potential exits through IPOs, acquisitions and such exits are possible only for highly scalable businesses. Since, such great returns are not possible with service companies; it is not advisable to invest in life-style companies.

5. Were there any similar deals done before?
Even before a company is taken through a due diligence process, it is considered essential to check if there were any similar deals done in the industry. If such deals were done, what were the terms on which the deal was done? What were the multiples used? How is this business different from the one already done? These analyses help in estimating the fair market value of the company and also get some realistic expectations of the start-up company.

Comments (9)


Numbers 1 and 2 must be three times as important as the other points


Thank you for pointing out.


Great insight, great post. I too noticed some of these things, namely #1. To me, the entrepreneurs that lost credibility really fast were the ones that claimed they had "no competition" .. EVERYONE has some form of competition.

"You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right."

-Warren Buffett


That is very true. Claiming to have no competition gives away the deception. And I believe the due diligence team should be more thorough in their work of analyzing the company.




I interned at a Silicon Valley VC firm. Their #1 criterion was Who introduced or referred the opportunity. #2 was Who's on the management team. Your various points then followed, in varying levels of importance. More important than any strict ranking of criteria, though, were the nuances and between-the-lines implications which were teased out during Monday morning partner meetings, and subsequently revisited throughout the decision-making process.


@"clerville" I appreciate you adding your insight to the post!


You're very welcome!

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