The Dojo of Commerce

“In the Western world, the term dōjō primarily refers to a training place specifically for Japanese martial arts such as aikido, judo, karate, or samurai.”

Welcome! This article is supposed to be a questionnaire for VC/startup people to master the relevant aspects of a commercial due diligence (DD). This list of questions should be answered precisely and any startup should be prepared for them. Find the main article here.

There are a lot of questions to be asked when it comes to the commercial dimension of a startup. Actually this part of the DD commences in the very first moment a VC talks to the founder or in the first scroll through the pitch-deck. As you can see in the chart of martial arts in VC DD you can define at least four different clusters of a startup’s commercial side: product, market, metrics and exit. Every question is fairly simple, but answering it sufficiently requires some training! As dojos are for many different fighting styles, they are phrased to be broadly applicable and limited in count. As always — non-exhaustive — but any exercise is better than no exercise.

Product/service

1. What does it exactly do?
2. Who is your customer?
3. How is the problem solved currently?
4. What exactly is the underlying problem?
5. Is the product something they don’t need yet but would love to use?
6. Who exactly takes the decision to buy? Is it one or multiple people involved in the buying process (decision makers vs. influencers)?
7. How is it delivered?
8. How is it being deployed on the customer’s side?
9. How long does a customer use it?
10. What kind of lock-in do you have?
11. What are the minimum prerequisites that must be fulfilled to use the product?

Market

1. How can you measure market size in your case?
2. How many potential customers of the product are there currently?
3. In which direction does demand develop (anticipated growth rate)?
4. How can the competition and your positioning be described?
5. What exactly do you know about the competition’s traction and technology (do feature set comparisons, etc.)? Differentiate between direct (same/close product/service offering and indirect competitors (affiliated product/service offering up/down-stream the value chain).
6. Who are 3rd parties your product/service is relying on? How powerful are these? Do they might put your business under pressure by pricing or replicating and integrating a comparable solution?
7. Are or will there be certain regulations you (have to) rely on?
8. Which future changes are key to your success (e.g. changes in regulation or major technological shifts)?
9. Which regions can be described as „the market“? Differentiate between Total Addressable Market (TAM), Served Addressable Market (SAM), and Target Market.

Metrics

1. What are your top KPIs to be communicated to investors?
2. How do you price your product/service — fix vs. variable?
3. Which factor increases the price of your product/service per customer?
4. Which factor determines how many units are required by a customer (initially, but also over time)?
5. Which direct costs do you have per customer — fix vs. variable?
6. How do costs correlate and potentially create scaling effects?
7. How much of costs would be claimed as COGS and overhead?
8. What numbers yield positive earnings per unit (and at company level)?
9. When will be the first time revenues surpass costs? (Hint: it will be always later than you claim ;-))
10. How can you further tweak the billed revenue per customer (upselling)?

Exit

1. Which exit channels exist?
2. What is the core asset or value you build with your company (technology, user-base, data, etc.)?
3. How long will it take to create this asset or value?
4. Which institution would be interested in buying it?
5. Why would someone buy your company?
6. Are there comparable transactions by these acquirers as of today?
7. Who would be a better strategic partner than acquirer?
8. What is the current shareholder structure?
9. Which metrics do current investors apply — when will they be happy?
10. How many new investors/ capital is necessary to sleep well at night?

When thinking about these 40 questions in the context of a VC investment, of course, the “Exit” exercise is a tough one and doesn’t need to be included in the very first run. However, a VC always has to find an exit plus an overall view on the case does help everyone. No dojo is visited once and exercises do change — so congrats for your first session and do not hesitate to get some more reps!