Baseline Criteria (for the pitch to answer)
These criteria are based on The Heilmeier Catechism (adjusted for commercial allocation, and based on my own experience).
WHAT are you building?
- Explain it in 3-5 words.
- Explain it in 10 sentences.
Is there a MARKET?
- Who is your customer?
- If you are successful, what new thing does this allow your customer to do that they could not do before?
- Do you have some customers advising you? Who are they?
- What is the customer acquisition plan (short version, as it will likely change)?
CAN you build the thing?
- What is your development plan? (Show a program plan that includes development tasks with cost, schedule and risk factors per task in a single consolidated plan)
- Who is leading this team? What are their qualifications?
- Who is actually doing the work? What are their qualifications?
Frontier & Multi-Tech Criteria (for the technical due diligence team to answer)
These are additional criteria specific to these kinds of systems because of their inherent complexity. Do not rely on the pitch to define these. These need to be defined and confirmed by the technical due diligence staff at the allocator level.
What Is/Are The Binding Constraint(s)?
This could be regulatory, talent, power, materials, cryptographic, network connection, manufacturing capacity, or even community sentiment. Does the team control the binding constraint? Do they own it versus rent it, or have some influence over it to reduce risk?
What Does Failure Look Like?
Make a failure map. Start with this project failing and map back to how that starts and therefore the probability of technical or managerial failure and how to prevent it.
Expected Actual Demand
Is this project ultimately providing something that the customer will not be willing to live without?
Gut Instinct Criteria
- What is fact and what is assumption that needs to be proven out?
- What is the hard thing that this project should do first to reduce risk?
- Where are they likely to run into their first technical or managerial wall?
- Can they pivot without going under? How many times?
- Do they have sufficient runway to withstand the likely length of their development, not just survive until the next VC round?
- Can this project’s leadership make the hard choices to kill a task, pivot or replace talent as needed?
- Take a hard look at their leadership. What are their motivations? Have they failed enough in the past to prevent failure now?
Caveats For All Diligence Efforts
Be careful not to protect your narrative at the cost of missing a great idea.
It’s not about protecting the narrative you think will be true, as much as protecting the investment towards what will actually be true. By that, I mean that is it best to stay open to being wrong or to someone else having a better idea or method that I did not think of; while simultaneously looking for the red flags I know will lead to problems with technical development, management, distribution, regulation, etc.
The pitching team is fooling themselves. Find out where they are delusional.
It is important to dig for what they are not telling you, and for what they are not even admitting to themselves. This is where a well honed BS meter and the ability to pull the right information out of a team is critical. I guarantee they are fooling themselves. The job of the technical due diligence team is to find those points of assumption where the project team is likely to be wrong or be surprised. Such moments are guaranteed. The question is what do they look like, and can this team handle them when the time comes? This is where human due diligence matters as it requires a level if instinct that is only crafted over time and experience.
Don’t get stuck on traditional venture stages. Seek the 10X-100X opportunity.
The concept that every company grows through a specific series of investment rounds towards the ultimate goal of a traditional equity stock IPO is outdated. Companies don’t necessarily need large teams of people, and can issue a token on day one. I would work across stages wherever the 10X-100X opportunity may be.
Don’t wait for companies to come to YOU. You have to find them first.
Because companies don’t need large teams or stock IPOs, many don’t need investors either. You cannot wait for companies to bring the opportunities to you. I recommend an active scouting initiative that finds the potential opportunities proactively.