In two past posts, I talked about doing due diligence on startups. The first one was The Lack of Due Diligence is Appalling and Foolish where I lamented that most investors I met out there did virtually no due diligence whatsoever. Then I talked about how simple and easy doing The Due Diligence Customer Call was, and some suggestions on what to ask. There are two more topics I would like to tackle in the due diligence area. Last year, John Lanahan in our research team tackled research due diligence in Efficient Research: The Lean VC Way. The last part of due diligence that I will post about today is corporate due diligence.
In my Lack of Due Diligence is Appalling and Foolish post, I give a short list of documents I ask from the startup before investing. I have expanded that list slightly, adding debt obligations, business contracts, and then I modify it based on the situation and startup in question, but it has essentially been the same over the years. Most of the time I collect all this into a Dropbox folder and send it to my lawyer for review. It has always amazed me that it takes him only 1-2 hours to go through this- I guess when you look at a lot of this stuff, you get used to reading it and picking out specific stuff to look for. Every now and then, I get the opportunity to do corporate due diligence myself and yes I can definitely say it can take you only an hour to do this!
Generally, the corporate due diligence step I leave for the last step, after doing customer calls, reference calls, and research on the market. I don’t want to ask for corporate documents unless everything has checked out up to this point, since those documents are confidential to the company and I want to respect that.
Note that I am ONLY talking about early stage startups: companies that have been only in existence for less than a year and have not had many business operations. Corporate due diligence can grow exponentially when the company has been in operation for years and then there are tons of documents and contracts, which can take teams of lawyers weeks to review. So feel lucky that at early stage, you don’t have much company history to go through! But sadly, there could be a lot still to worry about….
So yes it can take only an hour! Just a few months back I did just this with a startup and zinged a bunch of questions back to them for inconsistencies and missing items. How does one do this? Some tips:
1. Do this often. Get used to reading legalese and understanding it quickly.
2. Learn to recognize standard legalese in corporate documents and when they diverge.
3. Learn to read and scan text quickly.
4. Take notes in a separate notepad or document while reviewing, so you can come back to important points or questions.
OK those are the preliminaries; now what to look for? Some common things I’ve learned to look for are:
1. Which items in the list are missing and why?
2. How many shares are authorized in the Articles? It is better to see 5M or 10M authorized. I would raise a flag if only 10K or similar shares were authorized. Lower numbers authorized also can indicate that someone incorporated by themselves at some online easy incorporation website – not the best option.
3. Scan through the board meeting minutes, assuming they exist. Identify any inconsistencies in personnel, consultants hired, stock granted to individuals and why, business dealings, operating directions, and information in the minutes and the other documents.
4. In the stock purchase plans, are people vesting or do they own stock?
5. If there have been previous financings, what do the terms of those financings look like? Do any have any effect on your money coming in at this time?
6. If there are any contracts, are there any problems with those contracts relating to future business?
7. If there is any debt, are there any liabiltiies to be aware of? Any liens on the assets of the company? Who gets paid back first and when?
8. Who is the lawyer? Be wary of lawyers who are not familiar with early stage startup work. Their lack of experience can cause all sorts of unwanted trouble – doesn’t mean they aren’t good lawyers, just means that lack of experience on what is acceptable and what is not can be a barrier to getting things done.
9. How much is owned by founders, employees, and, if any, previous investors? Is this acceptable to you?
10. Go to the site of the state in which they are incorporated and search for them in the incorporation database. Make sure they really exist there!
11. Write down all people and companies you encounter in the documents. Did they get money or stock? Or were there contracts that were entered into? Are they accounted for in other documents? Check the cap table – is anyone missing? Check on why anyone would receive money from the company.
There are many more that come up, but those are ones that I’ve encountered in previous deals. I also asked my lawyer for a broader set of Top 10 things to look out for, from his perspective, listed here:
1. No Organizational Resolutions (after Articles, to set up the company, appoint officers, etc.), or they are incomplete.
2. No qualification filed in state of domicile (e.g., DE company located in CA, no filing made in CA).
3. Docs are provided, but they are unsigned.
4. Company is set up by an Incorporator, but there is no Action by Incorporator adopting the Bylaws and appointing the initial Board.
5. Stock Options granted, but a Stock Option Plan was not adopted by the Company.
6. More stock issued than is authorized by the Company’s Articles/Certificate of incorporation.
7. No Board Consent or Minutes approving the current financing.
8. Notice of Stock Transaction (in CA, a 25102(f) Notice) not filed with the State for the sale of stock.
9. No Cap Table.
10. Founders acquired stock but did not sign a Stock Purchase Agreement.
My list and my lawyer’s list provide a great starting point. These lists are not, by any means, exhaustive. My best recommendation is always to collect the information and then send it to your lawyer for review and spend the money for it to be done by a professional. In lieu of that, it is always educational and interesting to go through these documents by yourself and try to spot potential problems. I always scan the documents, even when I send them to my lawyer, for practice, and also to double check his work because sometimes I may find something that he may miss, or I may care about something due to the nature of the company and situation but he won’t know it’s important since he isn’t as close to the deal as I am.
The next step is to then decide whether you’re OK with what you found or not. At early stage, it is common to find lots of corners have been cut to get to where they are now. Many early stage rounds are completed with big discrepancies in the corporate documents unfixed. If an institutional investor comes in, they will most likely demand clean up. I have often asked to clean up, even at low levels of investment. Rarely do I find that an entrepreneur won’t clean it up; most of the time he/she knows it has to be done anyways, so why not now?
Other red flags:
1. I have asked for corporate due diligence documents and the entrepreneur has refused to provide them.
2. The entrepreneur doesn’t want to clean up the documents, or constantly backpedals when you ask.
I have walked away from deals, after doing all sorts of other due diligence and then got to corporate due diligence and either one of those red flags pops up or I find something that I cannot live with. Do not skip this step!
Doing corporate due diligence is a necessary step no matter what the level of investment. It is best done by spending a little bit of money getting a professional eye to look them over. And it can be done on the cheap by doing it yourself.
Thanks to Mark Edwards of Edwards Law Group for contributing to this post.

This must be the favorite sentence uttered by entrepreneurs. But who can really lay claim to this statement being true? Could someone truly have no competitors?
Usually what happens is, after the pitch I go back to our research team and after their digging, we find a mass of competitors. How could that be?
In thinking about competitors, I find there is generally a difference of opinion between me and the entrepreneur that is driven by the different types of competition, and whether the type of competitors that exist matter to us investing or not. Then add to that how market forces shape competition and this all gets pretty complex.
The Different Types of Competition
What are the different types of competitors? Looking out on the Net, I found these categories of competition:
Direct/Existing Competitors – usually the easiest to find, these are companies with products who are the same are very similar to yours, and attempt to serve the same need.
[source: Different Types of Competitors by Peter Halim]
Entrenched direct/existing competitors are those who have been around for a while and have grabbed a lot of market share before you showed up.
Indirect or Mindshare/Category Competitors – these are companies who provide alternatives to the need your product solves or the resources that your using your product would occupy, but it may not be obvious that they are taking away share from you.
“Just because your offering is unique, doesn’t mean it is unique in the mind of your prospects. To a prospective customer a marketing strategist, web designer, direct mail specialist, graphic designer, video producers, and print shops may all provide “marketing”.”
[sources: 4 Types of Competitors, Different Types of Competitors by Peter Halim]
Potential Competitors – these are companies who have the capability and the will to enter into the marketplace with a product and become a direct or indirect competitor to you.
[source: Different Types of Competitors by Peter Halim]
Replacement Competitors –
“A replacement competitor is something someone could do instead of choose your product, but they’re using the same resources they could have committed to your product.”
[source: Market Competition 101: The 3 types of competitors to keep an eye on by Daniel Burstein]
Budget Competitors –
“Even if your products and services are truly unique, you still have to compete for the same budget dollars that other service providers are vying for.”
[source: 4 Types of Competitors]
This also applies to the regular consumers. How hard is it to get customers to part with their money, if there are other choices possible? How many subscription services can a consumer have on their credit card before they say enough is enough? Advertising agencies have set budgets per year; if it all gets spoken for, you may not get access to valuable ad dollars simply because it’s been all committed.
Doing Nothing – In the face of certain situations, it may result in a potential customer doing nothing as a way of deciding. This may result from having too many choices, or too difficult choices, or somehow being prevented from making a decision comfortable to the customer. It is worthwhile to ask, how can you eliminate this type of competition?
[source: 4 Types of Competitors]
What Matters to Us in Investing
You’re probably thinking – Wow, Dave, that’s a big list! Isn’t that being a bit unfair to a fledging startup? Wouldn’t the world be our competitor if we lay this kind of analysis on my startup?
You’re partially right – as investors we like to look at your project from all angles and weigh the odds. What’s the probability that a competitor, or competitors, will emerge and make life difficult or impossible for a startup we’re looking at?
So taking those categories of competition above, we try to see who is there and who is not.
Direct/existing competitors are the worst. You have to come up against them and fight head to head for market share. Some of them are entrenched and thus you could have a tough time grabbing share from them. On the other hand, if they are traditional, slow moving big corporations, you may have an advantage in being a quick moving startup entering with a significantly better product. Competing against other startups – that’s sometimes much harder.
The other categories are much harder to judge. We have to make a personal call as to whether or not we think the risk is too high or low enough to give the startup a fighting chance.
Market Forces Confound the Competition Analysis
The only problem is…there are too many internet startups now. There has been an explosion of entrepreneurism which complicates the competition problem.
Previously, we talked about Mindshare/Category Competitors. This was when your competitors could come from a broader category and those could become your competitors inadvertantly. However, with the enormous number of startups out there, the Category becomes so broad to emcompass all internet, meaning the fight for customers becomes the battle for attention where everyone is your competitor.
The Last Category: Everyone is Your Competitor
While this is probably true to some degree at any time, it jumps to the forefront in times like today. That’s what is happening now; there are too many startups for both consumers and B2B customers to process quickly. If they cannot choose you fast enough, then your growth is stalled, causing you to burn through your cash before you can get to breakeven. Time is the enemy of startups – you cannot wait for people to process too many choices; you need them to use you quickly and they simply won’t. This is why we see startups needing 24-30 months to get to someplace of stability, or to get to their next funding event.
This makes the investment decision much harder to process. What’s an investor to do?
We could wait for times to change. The world moves so fast now – it is possible that within a year or two, the battle for attention may abate. Or it could get worse.
What it does mean is that for now, as we evaluate startups, the best we can do is to acknowledge the battle for attention is very real but we are being very picky now.
At this point, we try only to pick startups that have really no direct competitors, or have only old, traditional entrenched competitors. The world of internet startups has reached to almost every corner of every major industry; however, we are still finding some unturned stones, businesses and markets that have not been touched by internet startups yet. This is where we are finding the last remaining internet startup opportunities that literally have no direct competitors, or at best, competitors that are old, traditional companies which we are betting cannot move as fast, nor have the expertise or innnovative spirit of a startup.
In the old days, investors picked startups who had no competitors. The internet wasn’t around back then and competition was different in other industries. With the internet, competition pops up with great ease and speed. We now look for those rare, few startups that have still no direct competitors and advise them to stay stealth, just like in the old days, to avoid other internet entrepreneurs from creating competitors literally out of thin air.

A few weeks back I met with an entrepreneur who had recently closed a round with a large VC. We got to talking about what it was like to work with that VC, and he mentioned that it was a little strange because the VC was pushing for these really bizarre terms. After he described them to me, I too agreed they were bizarre, but then I said I’m pretty sure I knew why he was pushing for them, which was I bet he had gotten burned on them in the past. The entrepreneur’s eyes lit up and said that was right! Eventually, the VC admitted this to him, talked it through, and they came to agreement on terms.
I can sympathize with that VC. Since 2006 when I started investing in startups, I’ve gotten caught by a lot of unexpected traps and rookie mistakes. These have definitely driven my current thinking on how I like to pick startups and their teams, finance them, and what terms are important to me. I would definitely admit that this was the most expensive education in any subject I’ve ever learned. Where else can you piss away 10s, if not 100s of thousands of dollars on situations that you may have avoided through better experience or forethought? Or maybe lady luck just decided to slap you down this time out of nowhere?
It was one of the reasons why I wrote this post a few years back: More Reasons Not to Invest in Notes. In the notes that I’ve done, I’ve seen many unexpected things happen. And this is why my boilerplate note has grown to include many things beyond the vanilla convertible note that someone might use.
But then, there are investors I’ve met out there who have never had anything bad or weird happen to them. This fact still amazes me that there are those out there like this. Still, it is my belief that the more you invest, the more likely something bad will eventually happen. You can’t avoid everything bad that can happen to you; you can only do so much to protect yourself.
In our attempts to protect ourselves, the entrepreneurs we meet often suffer from our past. We argue for certain agreements and terms, some of which seem downright strange and we can be pretty adamant about those terms. We may even get emotional about them and refuse to back down on them as negotiable items.
Sorry about that. The more we invest, the more we are scarred. The best thing you can do is to be like a good therapist; sit and listen to us rant and rave. Nod with sympathy in your eyes. Let us know you understand. Pat us on the back. And when we calm down, we may actually give…or not. Like traditional therapy, some things can be cured and others…well…probably never…

Lately, I’ve been doing meetings with young startups in recent accelerator batches and meeting them for the first time. It’s been great to hear that they’ve bought into the iterative method of customer development and most of them have found their Minimum Viable Product or MVP, or they are well on their way to finding MVP.
This is awesome but in today’s world, you can’t raise money on achieving an MVP. Investors demand more than that.
As Steve Blank likes to say:
A Startup Is a Temporary Organization Designed to Search
for A Repeatable and Scalable Business Model
[source: Nail the Customer Development Manifesto to the Wall – Steve Blank]
The unfortunate reality is – an MVP is not the above! Yet most of the newly minted entrepreneurs I’ve met think their job is nearly done when they’ve found MVP – they think they can go build a pitch off their early MVP and raise money!
A startup does require MVP but it is much more than just MVP. The problem is that MVP means early adoption of product and its features, maybe even some who will pay. But it doesn’t tell you how many people will do it in the long term and whether this can support the company (the people and operations within) that is behind it.
So startups are much more than MVP and requires thinking beyond just the product. This is where I’d like to coin a new acronym, which is Minimum Viable Company or MVC.
What is a MVC?
First, I would say MVCs only apply to early stage startups – you can’t really talk about achieving MVC status for a company that’s been around for a longer period of time. To be minimally viable as a company, I would say:
1. It has achieved breakeven or profitability, or has a believable and achievable plan to get there.
OR
2. It has achieved enough metrics to reach its next funding event. This includes the first funding event.
Or ideally both.
The Fundable MVC
An MVC must have achieved some sort of MVP, but having MVP doesn’t mean you have achieved MVC automatically. Nor does it mean you’ve achieved the next level of MVC which is a FMVC or Fundable MVC.
Remember that many MVCs can generate cash, but how much exactly? If you reach small or medium business status, that is great; it takes no little effort to make $500K, $1M, or several tens of millions of dollars per year. It is a notable achievement to employ a building full of workers, insuring them pay and livelihood, and providing or shipping product and services to customers. This is a win by many measures.
However, many companies like these, while there is every reason in the world for them to exist, unfortunately are not attractive to investors. This is because while they are doing great work, the likelihood of investors getting their money back and then some is very low or zero. This is the difference between an MVC and a FMVC.
We have not, as an startup/investor community, figured out how to invest in those companies whose trajectory is heading towards small or medium business status. Right now, all startups are being funded as if they are going to exit like any high growth startup. Anybody on a lesser trajectory simply won’t attract the funding it needs unless more effort is done with other funding sources or structures.
Therefore, it is the FMVC that every startup needs to achieve. What are the characteristics of a FMVC? Everything that a seasoned, high growth investor looks for: big market, big vision, lots of revenue potential, world domination plan, etc. This is what will increase the likelihood of funding, not presenting your MVP at a demo day, or even a plan for a MVC, but your plan for a FMVC.
How do you turn your MVP into a FMVC?
First, you must realize that not all MVPs yield a FMVC. MVPs could yield a MVC but not FMVC. Many MVPs have potential to attract some customers, but not enough to create a company and an opportunity large and tasty enough for investors to want to put money in. This is also dependent on the market in general, meaning that 5+ years ago when there weren’t so many startups sprouting up all over the place, you could have achieved an FMVC with your project; however, in today’s crowded startup world, you cannot.
While every project is different, I point you to some suggestions on examining what you are doing now in hopes of turning it into a FMVC:
1. Iterating on MVCs is a good thing to do; keep trying out business models and plans until a FMVC shows up. It may mean giving up on your current MVP and looking for another one. Do not be afraid of going back to the drawing board if you find your MVP does not yield a satisfactory FMVC!
However, your time limit is your bank account. Never forget that. So working rapidly and lean is key.
2. Do you have a World Domination Plan? Is it believable? If you can envision a world where your MVP dominates whatever market and customers it is pursuing, is that big enough?
3. Are you too focused on the solution and not on the problem? Becoming too myopic about their product and forgetting about how this turns into a big company is something that I find happens with many entrepreneurs. They get caught up in the success of finding a MVP, but don’t realize that they not only need a MVP but need to achieve MVC and hopefully FMVC.
4. Following on 3., it would probably be a good idea to pick up some MBA skills and start running models and scenarios to see where a given MVP can become a MVC, or potentially a FMVC.
5. A good measuring stick I use with startups is to ask what the $100M/year revenue scenario looks like. Generating $100M in business per year is no small feat – you get there and you’re well on your way to becoming a big business. So can we imagine a world where your startup is making that much and believe it?
6. The weird thing about some startups is, that some break into such new territory that it is very hard to model or you can’t model anything. New industries, new markets, or products and services that customers cannot imagine having or using are like that. So the FMVC you could create is purely via pitch, arrogance, confidence, etc. – whatever it takes to woo an investor to write a big enough check on what you plan whether you have product or not. In order to accomplish this kind of FMVC, your credentials must be unique: you must be well-known to the investor, you must be trusted. Ideally, you would have had an exit or more for that investor. You must show “extreme” entrepreneurial traits: be able to employ persuasive language, compelling/grand planning, superb salesmanship skills and technical skills, among others. These are the people who can get funding on a powerpoint when others flounder even with revenue.
This can be enough to win you funding and survivability.
In short:
1. An MVP is great but not enough in today’s market to win funding.
2. An MVC generally means you have MVP, but an MVP does not guarantee MVC.
3. An MVC can yield a small to medium business, or a big world dominating one. There is nothing wrong with building any of those types of businesses and the world is big enough for all kinds.
4. However, we do not know how to properly invest in small to medium businesses. Our money may not be returnable from such businesses using the current equity structure of our investing. Thus, we want to invest in FMVCs.
5. As someone who is trying to build a real high-growth startup, therefore, MVPs or MVCs are not enough. You must search for a FMVC.