Due diligence – what is important for digital acquisitions?

Over the last month we have supported a wide range of acquisitions in Germany with eTribes. On the one hand we have worked with our clients to identify targets on the other hand we are constantly asked to evaluate business ideas by VC/angle investors or by entrepreneurs who are looking for feedback. In addition, we also have to work with the CEOs of our equity participations to create new business models and to react to a digital environment that has really picked up speed. Through these various mandates and evaluations a range of points have come up again and again – so I am now publishing a quick summary. I am hoping that some of it will save me from hearing the same catch phrases over and over again e.g. if I had a dime  for every time a marketing plan consist of “it will go viral”  I could probably buy Apple.

Team

Probably one of the most overused catch phrases is “team is everything” but again it is absolutely true. Give me an A team with a B idea anytime over a B team with an A idea. Therefore, we pay  lot of attention to the skill set of the founds and team – are they complementary? Can they cover the entire needed range from business skills to online marketing expertise? Will they be good at sales? How do they deal with stress? How well do they talk to investors? Here, we do not only look for solid CV credentials but also talk to people they have worked with in the past to get a good understanding of the work they have done historically.

Additionally, I would argue that not only having a certain skill set is key but that implementation trumps credentials every time. What do I mean by that – some people will have worked in corporates and gained substantial experience in a field (on paper) without ever actually doing the work. Supervising an add agency that prepares an online campaign is not the same as running your own web project with a marketing campaign you have to set-up and optimize. Often people will be surprised by the difficulty that is in between theoretically understanding a concept and implementing it.

Customer Acquisition Cost

This key variable is often connected to the marketing section shown below. 9 out of 10 entrepreneurs we talk with have not thought scalability and customer acquisition cost through. Every time we are surprised by this – online business models collect an amazing amount of data and so determining a rough estimate of customer acquisition cost very early one is not very hard. How much does it take to get a customer to buy your product? How often do you need to be in contact before a purchase is made and what does each contact cost? How often will your customer come back e.g. what is your customer lifetime value? I do not expect to get a formula that is absolutely correct but I do expect the entrepreneur to have thought about this!

Marketing (Viral does not work!)

Marketing is expensive. Even in times where zalando clearly spends millions and millions on advertising most business models still think that if there product is strong enough customers will just be running through the (non existent) doors of their website. Here we most often see horribly wrong assumptions about marketing costs. These days it is incredibly hard (and expensive!!!) to differentiate yourself online and to get a customers attention long enough to place your product. There are very few viral models that have worked historically and generally these work only in the United States and not in Europe.

An accumulation of hype phrases is not a business model

Oh my – have you seen my newest mobile optimized app that through geo location really adds value in the social media space through its gaming characteristics … 🙂 Going to a digital conference and adding all the seminar titles together does not create a business. Where is the differentiating value? How do you plan to make money? How do you acquire your customers? What problem do you solve? These are questions that are not answered through hype phrases but through well thought out business plans!

Money & Billing 

So often I see entrepreneurs who sit here and tell me that they have already several very happy customers – my next questions always is: great, what is your revenue? Unbelievably enough I often get the reply: well we are using a freemium model and are not actually charging anything. If you do not value your product enough to charge money for it, why would or even should your customer value it? How honest is feedback for something you get for free? Make money right from the start – get a billing system and send out invoices!

Hockey Stick (but only in sales)

Never missing is the famous hockey stick for sales projections – customers will love the product after 6 months and make you rich. Unfortunately, lots of business plans show this trend but neglect to create a sensible cost to revenue ration. I do not believe that you can either increase revenue by 10x without hiring additional people nor do I think that additional people will not need new / bigger office space etc. Often business plans will have a strong cost /revenue correlation for 6-12 months and in month 18 show entirely surreal ratios.

Team

Is key! So here it is a second time 🙂