Due diligence can be sluggish, as described in Part 1 of this series. ADAP’s Four Hour Due Diligence process, developed over the last three years, is our approach to revamping how early-stage deals get done.
Here’s how it works. While some of the details can vary from company to company - and especially have in the last few months as we’ve been setting up ADAP Fund 2 - the key steps are the same.
ADAP works with a wide variety of accelerators, incubators, investors, and others in the early-stage impact ecosystem to provide qualified companies to consider for investment. For each company of interest, we do what we call a “ten-minute take” (#TMT), which is a very quick review of a company’s product or service, stage of growth, sector, and impact thesis. This will result in a polite “no” in most cases.
Three initial screens
If a company matches our top-level investment criteria, we have an initial conversation to get to know the entrepreneur and their business a little bit, after which we consider three screens:
Trust + plan + obituary
1) Do we trust the entrepreneur? (The entrepreneur should be applying the same screen to us, of course!)
2) Does the business model or plan make sense, and can we understand it as investors?
3) Do I care enough about what the entrepreneur is doing that we’d want the company mentioned in our obituary?
Through this initial call and any follow up discussions, we seek to quickly develop a trust relationship with the entrepreneur, which will lay the groundwork for a strong, healthy collaboration.
The Seven S’s
ADAP does more thorough diligence on companies that pass these three initial screens, structured around the “Seven S’s:”
Solution - Does the company address a critical social issue?
Shift - Does the solution represent a different approach to poverty?
Staff - Does the company have quality leadership and team?
Scalable - What is the company’s appetite and ability to grow?
Sustainable - Are the unit economics viable, and does the company have a clear path to profitability?
Strategy - Does the company have a well-defined strategy?
Series A - Will the company be attractive to investors likely to come in on Series A?
This is where ADAP spends much of its due diligence time. We evaluate the business and its leadership in detail to ensure that we make wise investment decisions that are informed and evidence-based.
Thorough but quick
Our process is designed to eliminate companies we do not want to partner with as quickly as we can. Managing calendar time is just as important as managing how much direct work time an entrepreneur spends with an investor. A quick “no” is one of the best things an investor can give an entrepreneur, especially if it is accompanied by a clear explanation.
Part 3 of this series digs deeper into our due diligence philosophy.