How to Prepare for Due Diligence with the Harvard Business School Alumni Angels of Greater New York

Author - Sharjeel Kashmir (PLDA 2007), President, HBS Alumni Angels of Greater New York (original post)

You nailed your pitch and made it through to the due diligence process. Now, the real work begins. Every VC and Angel group has its own process and it’s always a critical step to help decide whether to commit capital.

At the Harvard Business School Alumni Angels of Greater New York (HBSAANY), our due diligence process is expert-led, detailed, and vital to our investment success. We have ~30 sector leads with extensive expertise, experience, and networks. These leaders have all done well in their careers in their chosen sectors. They know what works and what doesn’t, and they’ve gone through many company/product launch cycles as product owners and investors and learned from them. When a company is selected for due diligence, a team is appointed with a deal lead, a committee of Angels, and sector leads to oversee the process.

Using a data room and a call or series of calls, this group conducts a deep dive into the startup’s viability, examining the management team, customer demand and preferences, market potential, competitive landscape, product-market fit, technology stack, financial health, and regulatory and legal standing.

Not all these factors are equally relevant to every early-stage investment, but at a high level, here are the critical elements that founders should be ready to provide information and validation on:

1.     Prove the Significance of the Customer Problems You Are Solving.

Share feedback from customers, partners, and industry experts to validate the company’s value proposition and market fit. Demonstrate the key customer pain points and provide insights into behaviors, trends, and emerging challenges that inform product development. Show us that you deeply understand these pain points and the market need and are well-positioned to capture demand.

2.      Prove the Market Size.

Demonstrate that you’ve analyzed market opportunities to assess size, trends, competition, and the target audience to understand the company’s position within its industry. If the company is creating a new market, the potential size may be difficult to determine. However, the analysis should still be based on available data, supplemented by reasonable assumptions where necessary. Key questions to address include: Does the company require tailored strategies for different market segments to appeal to diverse customer types? Should it pursue strategic partnerships with mutually beneficial incentives and compensation models to enhance growth and market reach? Validate your claims with as much data and analysis as possible.

3.      Prove Your Product Strengths and Articulate a Clear Roadmap.

Evaluate the company’s product or service to assess its unique value proposition, technological advantages, and potential to disrupt the market. This includes examining intellectual property’s defensibility, articulating a robust development roadmap, and a clear plan to scale in response to market demand. Assess whether the product meets customer needs and solves actual pain points, as well as its potential for widespread adoption. Additionally, evaluate the product’s adaptability to evolving market conditions, the strength of its competitive differentiators, and the team’s ability to execute long-term strategic objectives. Understanding these factors will help determine the product’s long-term viability, growth trajectory, and positioning within the market.

Beyond regulatory certification, it’s important to know the barriers to replication, what differentiates the product and service from similar solutions, and intellectual property protection, emphasizing unique features that are challenging for competitors to copy.

4.      Articulate a Strong Sales and Marketing Strategy.

Review the current customer base, sales pipeline, and typical sales process and timeline. This should include an analysis of the targeted customer segments, the sales cycle’s length and structure, and the conversion rates across various stages of the pipeline. Understanding these elements is essential for evaluating the business’s scalability and ability to expand its customer base efficiently.

The sales strategy will be assessed for its alignment with the company’s growth objectives. Does it rely on high-touch, enterprise-level sales, or is it geared toward a more automated, volume-driven approach? Additionally, we will examine how sales processes vary across customer segments, whether B2B, B2C, or partnerships—to help identify areas for improvement or optimization. A well-defined sales process, with clear metrics for lead generation, qualification, and conversion, is a strong indicator of potential for revenue growth.

In parallel with sales, marketing strategy is critical for customer acquisition and brand awareness. Analyzing the company’s marketing mix, including digital marketing channels, content strategy, customer segmentation, and customer acquisition cost (CAC), provides insight into how effectively the company is reaching its target audience. Understanding the customer journey—from awareness to consideration to decision—is essential for ensuring that marketing efforts are aligned with the buyer’s needs at each stage.

Additionally, customer lifetime value (LTV) should be compared to CAC to assess the profitability of the company’s marketing efforts. A high LTV/CAC ratio suggests the company has a sustainable customer acquisition strategy, whereas a low ratio may indicate inefficiencies or areas needing improvement.

An often-overlooked aspect of sales and marketing strategy is how a company plans to retain and engage its existing customer base. Are there strategies in place for customer success, loyalty programs, or upselling opportunities that could increase customer lifetime value?

Effective retention strategies help boost revenue and reduce the cost of acquiring new customers, leading to better overall unit economics. Investors will also evaluate whether the sales and marketing teams are equipped to scale rapidly.

Present a strong, data-driven sales and marketing strategy that will drive sustainable growth and profitability, backed by solid analytics and aligned with the company’s overall business goals.

5.      Show that You Have the Right Management Team to Get the Job Done.

Evaluate the capabilities of the founding team and key executives, focusing on their experience, past track record, and relevant skills. This includes assessing how their backgrounds and expertise align with the company’s vision and mission and their ability to execute the business plan effectively. It’s key to understanding the dynamics of the leadership team, including how well they collaborate, communicate, and make decisions under pressure. In addition to evaluating their qualifications, we will also consider their leadership style, adaptability, and ability to inspire and retain talent.

Identifying any current or potential gaps in the team is important, especially as the company scales post-funding. These gaps could be in product development, operations, sales, or marketing, and addressing them early is crucial for long-term success. We will also assess whether the team has the strategic foresight to navigate challenges, pivot when necessary, and maintain a strong culture as the organization evolves. Ultimately, the strength and cohesion of the management team are often the most significant drivers of a startup’s ability to execute and succeed.

6.      Show that Legal, Regulatory, and Compliance Issues are in Order.

Review relevant legal documents, including corporate formation records, intellectual property (IP) rights, employee agreements, contracts, and other legal obligations. This includes verifying intellectual property ownership and protection, such as patents, trademarks, copyrights, and trade secrets, and assessing the potential for IP-related disputes. Evaluate existing contracts with suppliers, customers, and partners to identify any unfavorable terms, long-term commitments, or clauses that may pose risks.

Additionally, assess potential liabilities, including pending or historical litigation, regulatory investigations, or disputes that could impact the business. Review the company’s compliance with industry-specific regulations, data privacy laws (e.g., GDPR, CCPA), and other relevant legal frameworks. Consider the company’s exposure to future regulatory changes, especially in industries with rapid or high regulatory burdens.

It’s also critical to evaluate the company’s approach to risk management, including insurance coverage, contingency plans, and the presence of any legal or compliance staff to manage these risks effectively. Legal and regulatory due diligence helps ensure the business operates within the law and is positioned to minimize future legal challenges, providing investors with greater confidence in the company’s long-term stability and growth potential.

7.      Provide Detailed Financial Analysis.

Review the company’s financial statements, revenue models, and projections to evaluate its financial health and growth potential. While financials at this stage may be preliminary and subject to change, they offer valuable insights into how management approaches financial planning, forecasting, and operational budgeting. The key objective is understanding the underlying assumptions, the financial model's structure, the business's economics and unit cost, and the logic behind the projections.

At this early stage, the reliability of the numbers is limited, but the quality of financial management and strategic thinking is paramount. Key metrics to focus on include the company’s burn rate (the rate at which it is spending capital) and runway (how long it can operate before needing additional funding). Understanding these figures provides insight into the company’s cash flow dynamics, cost management, and operational efficiency.

Examining the company’s monthly burn rate helps investors assess how effectively the startup utilizes its capital and the pace at which it will scale. A company with a long runway is well-positioned to execute its business plan, while a short runway can signal urgency and operational risks.

Investors should also consider the scalability of the company’s financial model. Are the revenue projections realistic, and is the path to profitability clear? Do the financial forecasts account for potential market shifts, customer acquisition costs, and operational scaling challenges? Reviewing these aspects ensures that the company’s financial foundation is solid and has the potential to sustain and grow its operations without overreliance on external funding in the short term.

Ultimately, this financial analysis provides investors with a clear understanding of the company’s ability to manage its cash flow, current financial health, and the strategies to secure its future growth, all of which are critical for assessing long-term viability and risk.

8.      Provide a Well-Structured Cap Table (Capitalization Table).

The cap table is a critical document that outlines the company's ownership structure. It details the types of equity (common stock, preferred stock, options, and convertible securities) and the terms associated with each class of shares. It provides a snapshot of how equity is distributed among the company’s founders, employees, investors, and other stakeholders. Understanding who holds control and decision-making power within the business is crucial.

In addition to showing ownership percentages, the cap table reveals the relative influence of each party, which can expose potential power dynamics or conflicts that might affect the company’s future growth trajectory. For example, if the founders’ equity allocation is low, it could be a red flag, signaling they may not have sufficient long-term incentives to stay with the company or remain fully committed to its success. Ideally, founders should retain a meaningful stake in the business, aligning their interests with those of investors and other key stakeholders. A well-structured cap table will also detail the equity set aside for the employee stock option pool (ESOP), essential for attracting and retaining top talent.

9.      Demonstrate that Operations are Ready to Scale.

Analyze the company’s operational processes, infrastructure, and scalability to assess its strengths and areas for improvement. This review should include process efficiency, technology and infrastructure, resource allocation (including human capital, capital, and physical assets), scalability and future growth, and key performance metrics. The findings from this operational review will provide actionable insights to streamline processes, strengthen infrastructure, reduce risks, and enhance the company’s ability to scale efficiently.

10.  Disclose a Full and Fair Risk Assessment.

Identify and evaluate key risks that could impact the company's ability to meet its business objectives. These risks are categorized into the following key areas: market, operational, financial, regulatory, legal, and exit risks. Market risks include competition, demand trends, customer concentration, and macroeconomic factors. Operational risks involve supply chain vulnerabilities, technology dependence, talent acquisition, and scalability challenges. Financial risks address cash flow, liquidity, debt structure, profitability, and financial controls. Regulatory and legal risks encompass compliance, intellectual property, and litigation. Exit risks focus on the feasibility of achieving a successful exit and potential valuation challenges.

There’s no such thing as a risk-free startup. Investors are looking for companies with a deep understanding of the risks at play and smart strategies to mitigate these risks, such as diversification, contingency planning, and management’s ability to navigate and address these risks effectively.

11.  Outline a Clear and Profitable Exit Strategy.

Investors are ultimately looking for a profitable exit that provides a return on their investment. This may come as an acquisition, an IPO, or a liquidity event. Due diligence should include an assessment of the company’s exit potential, including the size of the addressable market, strategic interest from larger companies, and the likelihood of achieving a successful exit in a reasonable time frame.

12.  Provide Excellent References.

Another critical aspect of due diligence is verifying the company’s track record and reputation in the market. This includes speaking with customers, partners, service providers, and industry experts to gather feedback on the company’s products, leadership, and execution. Investor references, industry testimonials, and customer satisfaction surveys can provide additional assurance that the company is reputable and that its product or service is valued in the market.

Due diligence is the cornerstone of intelligent investment decision-making, combining quantitative analysis with nuanced qualitative assessment to uncover both risks and opportunities. While early-stage startups demand an emphasis on market potential and team capabilities, and mature companies require a deeper examination of financial metrics and operational efficiency, the fundamental objective remains to validate the investment thesis through a comprehensive evaluation.

This systematic analysis encompasses everything from market dynamics and competitive positioning to financial health and operational capabilities, enabling investors to identify potential deal-breakers and uncover hidden value-creation opportunities. Disciplined due diligence helps companies gather insights from experienced investors and maximizes investors' chances of picking the right founders and placing the right bets.

Are you an entrepreneur seeking angel funding? Learn more about how to apply to pitch to the HBS Alumni Angels of Greater New York.

Author - Sharjeel Kashmir (PLDA 07), President & Screening Co-Chair, HBS Alumni Angels of Greater New York (see original post)

Sharjeel Kashmir invests in companies that have a hyper-focus on the customer and use innovation to disrupt the current landscape. He brings the unique perspective of having worked at leading investment banks, asset managers, commercial banks, retail banks, private equity firms, and innovative fintech startups. He currently serves as President of the Harvard Business School Alumni Angels of Greater NY (HBSAANY). Sharjeel has more than 25 years of experience working in financial services in the US, UK, Japan, Hong Kong, and Australia. He currently works as an advisor to investment banks and asset managers in NYC, focusing on transformational initiatives, deal sourcing, due diligence, and post-merger integration. Sharjeel has worked at or advised the world’s leading banks and asset managers including Goldman Sachs, JP Morgan, Bank of America, HSBC, Deutsche Bank, MUFG, SMBC, and ANZ. In addition, Sharjeel counsels the executive teams, CEOs, and boards of several early-stage companies on product strategy & development, capital structure, and the journey from negative to positive EBITDA. Sharjeel has been a member of the HBSAANY and served as co-chair of the screening committee since its inception. He is an avid art collector, enjoys golf and polo, and lives in New Jersey with his wife and son.

Entrepreneur seeking angel funding? Learn how to apply to pitch to the HBS Alumni Angels of Greater New York.