How do you manage uncertainty in due diligence?

1 Evaluate the sources

Not all sources of information are equally reliable or useful. You need to evaluate the credibility, validity, and bias of the sources you use to gather data about the startup, the market, the technology, and the team. For example, you can check the credentials, reputation, and track record of the founders, customers, or experts you interview. You can also cross-check the information from different sources and look for inconsistencies or gaps. Additionally, you can use third-party tools or platforms to verify or supplement the data you receive.

2 Test the assumptions

Every startup has some assumptions that underpin its value proposition, business model, and growth potential. However, assumptions are not facts, and they can be wrong or outdated. You need to test the assumptions that the startup makes and see if they are supported by evidence or logic. For example, you can use experiments, surveys, or simulations to validate the customer demand, market size, or competitive advantage of the startup. You can also use scenarios, sensitivity analysis, or Monte Carlo simulation to assess the risks, uncertainties, or probabilities of the startup's financial projections.

4 Update your findings

Due diligence is not a one-time event, but a continuous process. You need to update your findings as new information, events, or changes occur that may affect the startup's performance, potential, or valuation. For example, you can monitor the startup's progress, traction, or metrics on a regular basis. You can also track the market trends, customer preferences, or regulatory developments that may impact the startup's opportunity or risk. Additionally, you can revisit your initial assumptions, hypotheses, or criteria and see if they still hold true or need to be revised.

5 Trust your judgment

Ultimately, due diligence is not a science, but an art. You cannot eliminate uncertainty completely, but you can reduce it to a manageable level. You need to trust your judgment and intuition, based on your analysis, experience, and feedback. You also need to balance your rationality and emotion, as both play a role in decision making. For example, you can use frameworks, models, or checklists to structure your due diligence process and ensure consistency and rigor. You can also use your gut feeling, passion, or vision to inspire your due diligence process and motivate your action.

6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?