When you engage in any new project, you have to do some diligence. Buying a house? Do your diligence. Investing in a startup? Do your diligence. Considering starting a business? You get the picture. It’s something you do before you make a really big decision. Then you base your decision on that diligence. But the word takes on very different meanings when applied in different contexts. At The Combine, we do diligence prior to co-creating a startup with our clients.
Diligence is really no different than applying any form of scientific research: a methodical approach to exploring a business opportunity.
What is the Goal?
The simple answer is to learn, but it’s more complicated than that. Generally, whether you know it or not, you are seeking out Porter’s 5 forces that apply to the opportunity you are exploring:
- Buyers – who is your customer?
- Suppliers – who creates the product you’re selling?
- Substitutes – what are the alternatives? (note: doing nothing is an alternative)
- New entrants – who else is eyeing the marketplace?
- Existing competitors – who is already in the marketplace?
What is the Purpose?
There are multiple reasons why you may need to perform a diligence.
- Consultant – I need to become an expert on a business that I’ve been hired to advise, and I’ve never heard of this industry before today
- Investor – I need to decide whether to invest millions of dollars in a company, and the only source of information I have is from an extremely biased source
- Entrepreneur – I need to decide whether to commit several years of my life, most of my sanity, and the rest of my savings to this idea
- Sales/Marketer – I need to assemble a pitch that convinces an expert in an industry other than my own to buy a product from me
- Tech/Developer – I have one chance to select and develop the set of features that will win the market, and I have limited time and resources to do so
How Deep Do You Dig?
Diligence is often mistakenly compared to “discovery”. The two are not the same. Here’s a simple chart that outlines the differences.
|Scratch the surface||Formal (“no stone unturned”)|
|Usually a single component||1-3 months|
|Specific focus||Deep dive|
Mitigate All The Risk
Having a structured approach to a diligence saves time and ensures you answer the relevant questions. Does it make you fool proof? No! Even with all the research in the world, you can still fail. There are too many examples of startups that had everything going for them, and still failed. Why? The answer was likely in the diligence; however, just because the answer presents itself does not mean that the stakeholders heeded the data. That’s called “risk”, and that’s what you’re assessing when you do the diligence.
Oh, and by the way, it’s not just a ‘phase’ of your work. It doesn’t stop. You live in a dynamic, ever-changing world. The good entrepreneurs never stop researching – never stop learning. It’s also extremely difficult to know everything, but that’s a topic in itself.