The 9 Point Due Diligence Checklist for Fund Investments

Before an investor commits capital to a Fund Manager, it is common to conduct due diligence to evaluate potential risks and fit. Diligence helps investors sift through multiple investment opportunities to find the winners, by confirming the facts, profile, and abilities that could signal future success. The following is a sample investor due diligence checklist for funds:

1. Team

Get to know the team to ensure the investment is a good fit. This may take time — months or even years.

Questions to ask:

  • Who is on the team? What are their backgrounds?
  • Number of founding members or general partners? Tenure together? What is the split percentage of ownership across the team?
  • Talent for finding compelling companies? Do they often access stellar deals?
  • Interpersonal dynamics?
  • Is the team from a cold or warm referral?

2. Investment Thesis

Decide if the team’s investment thesis is a winning strategy. Look for distinctive ways the team will execute their philosophy to benefit their performance.

Questions to ask:

  • What is the team’s unfair competitive advantage? How will they understand/access/own companies better than others?
  • How big is the sector/market of focus? Is the market growing or largely untapped?
  • Can the model support top quartile returns?
  • Is there an opportunity to scale?

3. Performance

Evaluate the qualitative and quantitative attributes that demonstrate the team’s expertise. Too often, investors miss out on quality teams by using rigid measures for track record, such as prior top colleges or prior firms — go further to understand how the team shows investing prowess.

Questions to ask:

  • Do they have an alternative demonstration of investment ability, if a “conventional” track record is not available? For example, non-traditional investing background, prior angel investments, a foundry fund, an advisory share portfolio, a fund zero?
  • How do they illustrate diversity of intellect?
  • Are they able to mitigate the influence of “group think”?

4. Case Studies

Dig deeper into the team’s specialties. Focus on a historical, detailed examination of the team’s investment or involvement in a company.

Questions to ask:

  • How did they get into the deal? What was the source?
  • Date invested/involved? Ownership?
  • Why did they participate?
  • Are they planning to invest again in the next round?
  • What are the next milestones?
  • Any top quality co-investors?

5. Fund Model

Determine if the team’s model is appropriate based on your focus as an investor. Investing in them should achieve the portfolio mix you desire.

Questions to ask:

  • What stage of companies are they investing in? (e.g., pre-seed, seed, Series A/B, early-stage, late-stage, growth, etc.)
  • What sectors, geographies, and classifications are they investing in? (e.g., B2B, consumer, hardware, deep tech, generalist, impact, etc.)
  • What check sizes are they writing? Any maximum allocations by sector?
  • What is the size of their fund?
  • How many deals have they done in the last year?
  • What is their deployment timeline? (e.g., 3yr, 4yr) What is their ROI timeline?
  • Do they hold capital reserves? How much?

6. Deals / Sourcing

Understand the team’s process for bringing in new deal opportunities, now and in the future.

Questions to ask:

  • How are deals sourced? How are they tracked?
  • Do they exhibit nimble access into deals?
  • What best-in-class networks do they leverage, if any?
  • How are investment decisions made? Who and how many people are involved? Who has final say? Is there an investment committee?
  • What resources do they provide to their portfolio companies beyond capital?
  • Do they participate in opportunistic deals?

7. Ownership / Pro Rata

Clarify the terms that the team uses when executing their own deals. See whether their terms are able to optimize returns.

Questions to ask:

  • Do they have pro rata ownership rights, which are the right, but not the obligation, to invest in future funding rounds? What percentage?
  • Are they valuation sensitive for deals? Do they have a valuation range? How so?
  • How will they handle SPVs (special purpose vehicles)? Have they done them previously?
  • How do they coalesce other investors for SPVs? Do any other specific investors have priority in SPVs?

8. Structure

Verify the important structure and fee schedules in place. Understand what you are paying to invest in them.

Questions to ask:

  • What is their fee structure? Management fee? Carry fee?
  • What are fees on additional deals, such as SPVs (special purpose vehicles)?
  • What is their capital call schedule?

9. Purpose

Consider the long-term goals the team has made and whether they are aligned with you as an investor.

Questions to ask:

  • Is the team planning for longevity? Or does the firm cease to exist if the founding team leaves?
  • Does this opportunity have an overlooked protagonist with a significant stake? Does this team have a woman, person of color, or LGBTQ+ leader?
  • Is the team coachable? Forthcoming with information? Any red flags or obnoxious behavior of concern?
  • How often will you be updated on their performance as an investor?
  • Is the team doing something truly unique?

Following a clear diligence process helps determine if an investment will be as valuable as anticipated. Use diligence to uncover the most viable investments that can be the leaders of the pack.


More Articles:

Business Planning
The 10-Point Checklist to Launch Your Business
12 Steps to Scale a Business
How to Calculate Market Size
7 Steps To Assess Your Competition
Competitive Advantages That Last
Finding The Right Customer Profile
How To Measure Results
Know Your Niche & Costs
Developing a Go-to-Market Plan (GTM)
4 Steps of Customer Discovery Before You Launch
The Basics of Setting up a Fund

Pitch Decks & Messaging
How to Make a Pitch Deck for Your Fund
How to Write an Investor Update (With Example)
How to Write a One Pager
9 Easy Steps to Build Your Company’s Messaging
How to Make a Great Pitch Deck

Fundraising
3-Month Fundraising Plan — Priced Equity Round

Operations
4 Steps of Customer Discovery Before You Launch
A Simple Way to Track Your Business Finances
The First Service Providers To Hire For Your Business
Who Should You Hire Next?
Customer Service Basics
Save Your Business in 60 Days: Cutting Costs — Part 1
Helpful Tips for Better Operations
5 Ways to Productize Your Business
How to Choose a Lawyer for Your Fund

Sales
How Your Sales and Operations Can Thrive Post-COVID-19
Save Your Business in 60 Days: Increasing Sales — Part 2

Civic Engagement
The Importance of Denouncing Racism

Kaego Rust is CEO at KHOR Consulting. If you’re looking for help, contact kaego@khorconsulting.com or visit www.khorconsulting.com.

Photo by NCI

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CEO at KHOR Consulting, helping companies build business plans, pitch decks, and streamline their operations. Email: kaego@khorconsulting.com

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Kaego Ogbechie Rust

Kaego Ogbechie Rust

CEO at KHOR Consulting, helping companies build business plans, pitch decks, and streamline their operations. Email: kaego@khorconsulting.com

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