[HN Gopher] A Short 100-Question Diligence Checklist
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A Short 100-Question Diligence Checklist
Author : jger15
Score : 227 points
Date : 2023-03-27 13:00 UTC (10 hours ago)
(HTM) web link (www.thediff.co)
(TXT) w3m dump (www.thediff.co)
| WhatsName wrote:
| 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.
| pdpi wrote:
| 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).
| 0xbadcafebee wrote:
| 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.
| [deleted]
| scrapcode wrote:
| In this employment market, the last thing I'm doing is marching
| into an interview with a 100-question questionnaire.
| [deleted]
| crazygringo wrote:
| This is for investors not employees.
| eschneider wrote:
| 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.
| mark242 wrote:
| 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."
| whatshisface wrote:
| Wouldn't that simply be a "test" rather than a "Turing test."
| [deleted]
| blowski wrote:
| 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?
| mbesto wrote:
| Based on a scan of the questions they aren't actually meant
| to be answered as a Q&A (despite the author's description) on
| a spreadsheet / document.
|
| They are more about probing questions to start a discussion.
| hammock wrote:
| >A fair warning-- there are precisely zero companies in the
| world to which the answer to all of these questions is
| positive.
|
| Then consider it a score out of 100
| narag wrote:
| 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?
| eitally wrote:
| 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?
| cjohnson318 wrote:
| 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.
| silvestrov wrote:
| It is not the answers that are the output. It is making sure
| you have thought about all the aspects.
|
| Like homework in school: nobody publishes your essays, they
| only want you to be able to write essays.
| pdpi wrote:
| > And the better question: what do you think the list would be
| for the ten questions?
|
| That list would be the section headings. The individual
| questions in each section are just drilling down on the
| details.
| buro9 wrote:
| > 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.
| pas wrote:
| 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.)
| BLO716 wrote:
| 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.
| brianbreslin wrote:
| 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.
| red-iron-pine wrote:
| > 100 question
|
| > short
|
| wut
|
| listen, this is a good checklist and I respect the DD that would
| happen if you followed, but it ain't short...
| bearjaws wrote:
| 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.
| yamazakiwi wrote:
| You might be right about the liability but I would point out
| that not every investor cares deeply about security and many
| don't consider it at all.
| uptownfunk wrote:
| 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.
| danielmarkbruce wrote:
| 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.
| [deleted]
| Zetice wrote:
| I'm not sure it's a trap so much as arguably irrelevant, if all
| of the other elements exist.
| danielmarkbruce wrote:
| Invert that
| Zetice wrote:
| Then we'd both be wrong.
| danielmarkbruce wrote:
| ?
|
| I think I might have misunderstood your original point.
| Zetice wrote:
| 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.
| danielmarkbruce wrote:
| 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.
| Zetice wrote:
| 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.
| danielmarkbruce wrote:
| >> 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.
| Zetice wrote:
| 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.
| danielmarkbruce wrote:
| Nope, history shows the opposite when it comes to
| investment decision making.
| Zetice wrote:
| 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.
| danielmarkbruce wrote:
| History of investing. Goldman is almost all services with
| a touch of principal investing. Random walk is a book
| written by an academic.
| Zetice wrote:
| These aren't sentences, care you try again?
| wintogreen74 wrote:
| 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.
| danielmarkbruce wrote:
| 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.
| richnwan wrote:
| 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.
| DontchaKnowit wrote:
| 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.
| sandworm101 wrote:
| 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.
| renewiltord wrote:
| 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.
| ttul wrote:
| 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.
| AndrewKemendo wrote:
| Missed a few:
|
| - Are we a net benefit to the poorest of our customers?
|
| - Do we create pro-social interactions by default?
|
| - At maximum scale do the incentives of our shareholders,
| employees and customers align?
|
| - Are we thinking holistically about possible externalities?
|
| - What are the second and third order effects of our success on
| the broader society
|
| - Are we intentionally skirting or exploiting gaps or absences in
| democratically run communities in order to gain market share?
|
| etc...
| nazgulnarsil wrote:
| >Is there some non-economic outcome you're trying to support by
| investing in this company? Is the investment really the best
| way to achieve this?
| jsjshs wrote:
| this guy is the real thing. byrne hobart. exceptional writer,
| analyst, expositor; exceptionally precise understanding, at many
| levels of technical and historical abstraction.
| ChildOfChaos wrote:
| 'A short' and '100 questions' should not be in the same sentance.
| drummojg wrote:
| I read it as ironic.
| haswell wrote:
| Length will always be relative. 100 miles is both short and
| long depending on the context.
|
| In the context of M&A or strategic investment, and considering
| the range of topics, 100 seems like a good starting point.
| ChildOfChaos wrote:
| 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.
| nabla9 wrote:
| Good list.
|
| but I hope "What do people on Glassdoor say?" is a metaphor, not
| actual recommendation.
|
| Glassdoor's business concept is at odds with it's integrity.
| Glassdoor takes negative reviews down if companies request it.
| Bad companies always do.
| wcunning wrote:
| 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.
| 0xbadcafebee wrote:
| 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.
| marban wrote:
| One example why it's important to double down on human writers.
| jsjshs wrote:
| the guy who wrote this is truly exceptional.
| 1970-01-01 wrote:
| Wow, exactly none questions for cybersecurity. This is a
| skyrocketing problem, and we've all seen the headlines.
| bostik wrote:
| 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.
|
| 7 audits in one year was a bit much.
| [deleted]
| frakt0x90 wrote:
| 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.
| [deleted]
| mox1 wrote:
| Yea, this is the quiet part said out loud.
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