Investors have an unlimited amount of companies that they are able to invest in but it is usually the the investor that finds it’s niche or focuses on a specific market that usually comes out on top. If an investor is trying to invest in 10 different companies that are all in different market segments then it is highly unlikely that the VC firm will have the expertise needed in all of these different markets to truly provide a value add for the company.
In deciding on specific companies to invest in I think the investor needs to first become comfortable and knowledgeable about the market in which the potential company operates in. The investor has to be sure that is, or there will be, a large enough market for the companies product or service. Next the investor will have to create a relationship with the management team as discussed in the post “Both Sides of the Table” by Mark Suster. This is because as an investor you are not only putting your money into just a company but also making a bet on skill and drive of the management team.
Items that an investor would like to see when performing due diligence vary widely from investor to investor but a few are at the top of the list for most. The first box I would like to see checked when performing due diligence would be some assurance as the current entrepreneur’s plan to stay with the company/product for the long term. I would not invest in a company that has a flaky owner who is likely to to jump ship as soon as I invest or the company isn’t developing as planned. Another due diligence item at the top of my list would be my determination if the product/service is truly innovative and has a high growth potential. Investing this early in companies it is truly impossible to tell if the product/service offered will be a hit in the future but one must try to the best of their ability to try forecast it. As a VC investor I am looking for an extremely large return down the road to compensate for the risk I am taking on and thus I will have to be able to convince myself this company will provide these large gains in the future.
There is no set rules when performing due diligence it is truly different for each investor. But the overall factor is the investor must get comfortable with the investment in their own way. For some investors it is a gut feeling, others it may be they like the entrepreneur and others it may be purely quantitative and driven by financials only.