A fair warning-- there are precisely zero companies in the world to which the answer to all of these questions is positive. Many of the questions are contradictory when applied across the entire scale of an org and will only serve to frustrate all but the most persistent investors.
The true title for this article should be, "A Turing test to see how risk-averse you are."
Calling this a checklist is probably confusing. It's better described as a list of answers you should obtain.
For example "Has a co-founder stepped down?". A single yes or no answer doesn't tell you much. But an answer like "Yes, we had two technical co-founders who fundamentally disagreed on technical strategy" should be explored. Why did the disagree? What was the ongoing impact?
Seems like I'm in the minority but this is freaking awesome especially for newer investors who want to go beyond passive index funds (spare me any lectures)
Will going through the checklist for each investment mean you'll always be right? No.
But I think going through these questions as an exercise will help you understand what makes a good/attractive business which is a fundamental skill in investing.
Checklists are only ever as good as the data behind them. This is a goodish checklisk for the uninitiated. Cool. But do you trust the answers you are getting? Do you trust the date as delivered by the company in response to these very internal questions.
This list is also full of useless questions that tell more about the potential investor than the actual company. For instance:
>>If the company succeeds, does everyone—employees, managers, founders, investors, suppliers, customers—get about what they deserve?
"What they deserve"??? Really? That says nothing about the company. That only tells you whether or not the company's reward scheme comports with your personal notion of fairness. It is more about politics than investment potential. But maybe that's what people want these days.
Perhaps it is useful, but misstated? "At what exit valuation will each of the following categories obtain a significant outcome and a life-changing outcome? Founders, Series X investors, early employees, marginal employee."
The reason to care about Founders is to see if they have skin in the game. Investors to see if you're going to make anything. Employees to see retention and hiring.
Still a bit sideways but perhaps worth thinking about anyway.
But it would still have warned about something like Bolt - the marginal hire will have received an insane strike price.
I absolutely agree, I was a bit surprised to see the reaction.
This would have been enormously helpful to me early in my investing journey, just after learning basic definitions and reading some buffett-adjacent books.
This is a great set of questions when job hunting. Not necessarily to ask in the interview (though some certainly are), but to understand the business and more importantly to understand if the folks running the company understand the business.
Interesting that there is so little on the details of the product or service itself. This is a trap finance folks fall into - understand everything except the product or service.
When you look at some of the questions don't they implicitly require understanding of the product or service though? Things like incentives, market impact and unit economics can be presented in a product vacuum, but not understood.
Oh sure - you don't have to understand the product/service to understand many things about a company. But if you don't understand the product/service, you are hosed - it's the most important thing. A company can have all the other things right and they are in all sorts of trouble if their product/service is no good. In fact, it can actively mislead because the rest looks so good. On the flip side, ask anyone who works at a really successful company - you'll hear horror stories of mismanagement and bad incentives and all kinds of stuff. Companies succeed in spite of it when the product/service is the right product in the right market. Google & Facebook are the textbook examples, but there are dozens.
You called it a trap. I said it wasn't a trap, but indeed a valid way to evaluate companies. Knowing the product isn't as important as it seems to be, when you have evidence to demonstrate a number of other key factors such as market size, growth, founder knowledge, etc.
Ah, then I understood it. Yeah, it's a trap. As an example - you can't know market size without knowing the product/service in a lot of detail - for example, pulling the IDC report for some segment won't help much because you can't understand if the product can even address all that market, or if it might be able to address more than that market as defined. You can't understand founder knowledge if you don't understand the product/service in detail - anyone who knows more than you will appear highly knowledgable.
You can absolutely know and understand all of those things without understanding the product, mostly by asking the people who do understand the product.
Otherwise you're arguing against the concept of delegation, and there are several mountains of counterexamples were you to try.
>> You can absolutely know and understand all of those things without understanding the product, mostly by asking the people who do understand the product.
You can't figure who to trust (even if you don't realize it, it's analogous to Gell-Mann Amnesia), you can't put the pieces together in your head.
>> Otherwise you're arguing against the concept of delegation, and there are several mountains of counterexamples were you to try.
Delegating works to get work done, not to understand things. There is almost zero history of institutionalizing good investment decision making (Sequoia might be a one generation counter). Guys like Buffett sit in a room all by themselves. Almost every example of investment outperformance through time is a singular brain or very small team. If delegating worked, this wouldn't (and couldn't) be the case.
You can absolutely delegate understanding. If you don't, you are screwed as a leader. In fact, one of the things you have to give up as a leader is being the smartest person in the room.
I'll even go so far as to say if you can't understand something through someone else's expertise, you will not get very far in life.
Er, no it doesn't. How much about each of Goldman's investments do you think David M. Solomon knows in depth? They make thousands of deals each year, it would be insane and unsustainable for him to have deep knowledge about each, so he delegates.
If you're talking about fundamental analysis, you'd also be wrong, as my copy of A Random Walk Down Wall Street makes pretty clear. "Know a bunch of stuff about a company" is not a good investment strategy, or at least does not keep pace with well diversified index funds.
If I had to answer a hundred questions before, I wouldn't have done anything in my fscking life. Actually most of the valuable things I've done, I did because I didn't think twice.
Jokes aside... or maybe no jokes, but alas, this seems an interesting way of assessing any company, even from the inside. Is this for real? Is it too much? Any blind spots?
And the better question: what do you think the list would be for the ten questions?
> Is this for real? Is it too much? Any blind spots?
It's real enough, I've been involved in a few M&A and I'd say that there is always a reason why we've done it and that reason varies but focuses on a section of questions at a time.
Not all of these are always important. Sometimes you're acquiring the IP, or the customers, or the skilled people, or the exec team. Know what you're trying to acquire and why, as which questions matter to you will vary.
The one question list is "what's the biggest risk of your business". This sounds innocent (and definitely under-specified), but it requires known all the big risks and picking the most important one, thinking about timelines, micro- and macro trends, etc.
And then of course the answer itself is kind of irrelevant as long as you get the feeling that it gives you information, it's honest, it's not trying to cover up something, etc.
The most important part(s) of doing due diligence is that it has to be done and diligently by someone you trust. Outsourcing it to the subject of the whole process, and reducing it to checklists makes it 10/10 easy to game. It has to be done to the depth, detail, understanding necessary to have confidence.
That said checklists are very important to establish the possible areas for drilling down. But since time is always a premium it doesn't make sense to do everything just because it's on the list. (Hence your question of getting a shorter list.) But that list has to be tailored to the situation - as other comments noted.
And, obviously, this is why many people try to invest in things they know, and/or focus on areas they know. (And then fail if they ignore the tough questions that stresses them out, or forgot to diversify, or forgot to do reference class estimation and then class appropriate risk weighting. In other words the planning fallacy.)
I think the big thing is: what do you do with the answers? If you assume that all the answers are accurate (lol) then you still have make decisions that will affect yourself and others.
Yes, it's real, and yes, these are the kinds of things many investors, and most acquirers, will be thinking about.
The ten question subset would consist of things like: are business fundamentals sound, and is there a growth plan? is the existing leadership of quality to effect a step change over the next few years leading to exit, or will we need to bring in professional management? is the tech sound, secure and scalable (this is often least important)? is there regulatory exposure, and if so, how has that been addressed?
Despite all the people in the comments here dragging this. I think its useful for both early career employees or investors to read lists like this. This gives people frameworks and lenses through which to better assess the companies they are presented with. Lots of founders need to ask themselves these types of questions too. Are some of them overly simplistic, sure. Are some of the questions hard or impossible to answer from outside? Absolutely. But do the majority of them give you better critical thinking abilities about companies? yes.
For founders, if you try to generate an answer for every question in this list, you will uncover important blind spots along the way. You can then schedule time to resolve the unknowns, strengthening your strategy while simultaneously making diligence easier.
This is the type of list that makes you feel like you're doing it smartly. Most people will miss the point if they just end the DD process at data collection.
The real magic happens in the synthesis phase, where the information is synthesized to yield insight that informs the investment decision. Doing this part correctly is what separates those who really make it from those who don't (or just do okay/mediocre). Would love an article on this part (though no one would probably give this away for free). Most seem to place enough bets where they just get lucky.
Is completely missing the 100+ technical questions you get, essentially a mini ISO27001 assessment.
If you aren't familiar with IS27001 or HiTrust you would be wise to get your IT leadership trained up as these are massive liabilities that PE does not want to take on when purchasing your company.
Maybe, but I don't believe this context changes that, short should be a handful of questions, yes it's a complex subject, so 'concise' maybe a better word, but short? Absolutely not.
Great, another checklist for folks to cargo-cult their own man-made bureaucracy.
Maybe that's a speciality of german-speaking government's, but I find questionnaires without clear intend dehumanizing and time-wasting.
> How hard is it for employees to get promoted?
> How hard is it for them to get fired?
What do you plan to take away from these questions? Would be more useful to atleast provide your good intentions on what you are looking for when asking.
If I were to invest in a company, I'd want to know if you're going to have a problem retaining talent (either due to firing people for no good reason or for failing to give them career progression), and I'd also want to know if you're going to waste money on payroll (either carrying dead weight that should've been fired, or splurging on inflated titles).
With respect, if you don't understand the questions, they're probably not for you.
In this case, those two questions tell someone a bunch of things: whether bad employees might stick around for a long time, whether good employees might want to leave for somewhere with better career prospects, whether there is good process in place to manage and accelerate employee career growth, whether management is doing their jobs right, whether there are wrong incentives or motivators (for example promotions tied to performance alone which incentivizes accomplishing empty goals that promote politically-savvy employees and leave the company hollow).
Famously toxic companies have processes designed to use fear and politics to keep employees so worried about their jobs that they can barely do them, much less contribute to the improvement of the company. Those companies can still survive and give good returns, but they have to trade on market power, and on a personal note they're often unethical.
Except when companies have a breach, they mostly just get a slap on the wrist and everyone moves on. It doesn't tend to materially affect the success of the company except in very rare cases.
Those will be a huge part of the actual due diligence process.
I've been on the receiving end of a very intrusive one, and it was essentially an arduous multi-week long audit. (IIRC four weeks of evidence collection, followed by ~8 days of intensive interviews.) With the main difference to audits being that on the requesting side, there was someone who actually understood how security, human processes and business all intersect.
Sounds like someone had some money in FTX! After seeing all the social media influencers pushing the product and services, absolutely love this list.
The cooperative group think can be ... absolutely terrible, and having someone who is delivery to this level of scrutiny in a check-list style is probably the best I've seen in a long time.
I think that was actually the point of that question -- if they have only positive Glassdoor reviews, that means they're working really hard on their image and it's a redflag to investors that every other piece of data needs to be looked at even more skeptically, which I find to be generally true in concept. Or maybe I'm over-reading it to tie into the next question about suspicious reviews, but I knew about the Glassdoor thing you mentioned and assumed that's why those questions came together.
I recently interviewed with a company with an abysmal Glassdoor rating, hundreds and hundreds of bad reviews. I asked multiple people in the company about it and what they were doing to address it, and the best they could say was something approximating "there'll always be a few bad apples". I declined to join.
this guy is the real thing. byrne hobart. exceptional writer, analyst, expositor; exceptionally precise understanding, at many levels of technical and historical abstraction.
The true title for this article should be, "A Turing test to see how risk-averse you are."