Just to give a small recap, in the last article we spoke about the concept of ‘How to do due diligence when companies you look at are in different industries?’ We covered how to do due diligence when evaluating companies across different industries requires a tailored approach that recognizes the unique characteristics and challenges of each sector.
In this article, we’ll delve into ‘Issues that came biting later, which are missed at due diligence?’ We’ll cover how confusing early adopters with a true market pull can lead to misguided investment decisions and unsustainable growth. Early adopters are typically enthusiastic about innovations and willing to experiment, creating an initial surge of excitement and sales. However, this enthusiasm does not always translate to broader market appeal.
As always, we’ll try to explain the article using a story. Let’s begin!
Anita Shah, a seasoned angel investor in Bangalore, prided herself on her thorough due diligence process. However, like many investors, she had her share of investments that didn’t pan out as expected. Reflecting on these experiences, Anita realized that some critical issues, often overlooked during due diligence, came back to bite later. This is the story of those investments and the lessons learned about the importance of looking beyond surface-level successes.
The Illusion of Prior Accomplishments
- Anita's first significant oversight involved a startup named EduTron, an ed-tech platform founded by Rajiv Mehra, a celebrated serial entrepreneur. Rajiv had successfully sold two previous startups, and his track record seemed impeccable. Convinced by his prior accomplishments, Anita invested without digging deeper into Rajiv's adaptability to the new market dynamics of the education sector.
- Initially, EduTron gained traction with schools and parents eager to try its innovative approach to personalized learning. However, as the educational landscape evolved, Rajiv struggled to pivot the company to address emerging challenges such as remote learning and changing curriculum standards. His previous successes had not prepared him for the unique demands of the ed-tech market, and EduTron eventually faltered. Anita learned that past successes, while important, do not guarantee future adaptability and that understanding the specific skills required for a new venture is crucial.
Early Adopter Excitement vs. True Market Pull
- Another cautionary tale from Anita’s portfolio involved a health-tech startup called HealthifyMe. The company launched a wearable device that monitored various health metrics, and the initial response was overwhelmingly positive. Early adopters, including fitness enthusiasts and tech-savvy consumers, flocked to buy the device. HealthifyMe quickly captured what seemed to be a substantial market share, and Anita, swayed by this early success, increased her investment.
- However, as Geoffrey Moore’s "Crossing the Chasm" suggests, gaining the first 10% of a market can be deceptively easy. The real challenge is sustaining growth beyond early adopters. HealthifyMe struggled to appeal to a broader audience who didn’t see the device as a necessity. The product’s appeal was limited to a niche market rather than addressing a widespread, critical pain point. Anita realized that confusing early adopter excitement with true market pull was a costly mistake. She learned the importance of assessing whether a product could sustain long-term demand and expand its customer base affordably.
Entrepreneurs in Over Their Heads
- Anita’s third lesson came from her investment in GreenTech, a promising startup developing eco-friendly energy solutions. The founder, Vikram Singh, was passionate and knowledgeable about renewable energy. However, as GreenTech began to grow, it became evident that Vikram was overwhelmed by the complexities of scaling the business, managing a larger team, and navigating regulatory landscapes.
- Despite his expertise in renewable energy, Vikram lacked the broader business skills necessary for driving the company forward. He struggled with strategic decision-making and operational management, which led to missed opportunities and stalled growth. Anita learned that even the most knowledgeable entrepreneurs can be out of their depth when it comes to scaling a business. She realized the importance of evaluating whether a founder possesses or is willing to acquire the skills needed for future challenges.
The Importance of Real Customer Insights
- One critical adjustment Anita made to her due diligence process was incorporating more direct customer feedback. Before finalizing an investment, she began reaching out to potential customers and industry experts to gauge the genuine demand for the product. This approach helped her distinguish between superficial traction and deep-rooted market needs.
- For instance, when evaluating a new fintech startup, WalletWave, Anita personally interviewed small business owners who were the target customers. These conversations revealed that while the initial concept was appealing, the product lacked essential features that would make it indispensable for their operations. This insight allowed WalletWave to pivot and refine their offering before scaling up, ultimately leading to a successful market entry.
Conclusion:
Anita’s journey highlights the complexities of due diligence and the potential pitfalls of overlooking critical issues. Prior accomplishments, early adopter excitement, and founder capabilities must be scrutinized beyond face value. By learning from past mistakes and incorporating more direct market feedback, Anita improved her investment strategy. Her story underscores the importance of a thorough, nuanced approach to due diligence, ensuring that investments are based on sustainable growth potential and real market needs.