Aug 13, 2023

Developing Financial Products - Designing a Risk -Mitigating Diligence Process

Ready to develop your diligence process and refine your risk profile? Buckle up!

Happy Sunday, friends! In this continuation of our series on getting financial products to market, we're diving into your diligence process and risk profile. We've covered:


    1. Identifying a market need
    2. Develop your thesis, product and investment

Now let's take the next step!

Framework Alignment: Your diligence process should fit your product thesis and requirements like a puzzle piece. If not, inconsistency will creep in, leading to a mismatched portfolio.

Reminder: Attributes to Fund: Here's the list of company attributes and product thesis that we talked about last time:

  •   Revenue and growth.

  •   Sizing calculations.

  •   Health signals of the company and deal.

  •   Key risks and how they impact deals.

  •   Other value drivers or risk factors.

Refine Risk & Process: Now, sharpen your risk profile and develop questions that really matter, and that will drive you to a yes/no decision. Don’t get hung up on things that you think other people care about; build a list that works for your product and thesis:

  • What events, decisions or actions might impair or fail a company, and what are the probabilities of each?

  • What are the no-go downside scenarios, and what are the features of the industry or company that contribute to them?

  • What can you do to protect against specific risks that you foresee (e.g., subordination to other capital providers, bad decisions, macro events), and how can you mitigate them?

  • What are the positive scenarios to bank on, and what is their likelihood?

Checklist Magic: Now, develop the questions and tools you need to uncover and understand each of these risks or scenarios. Turn this into a diligence checklist. Go quantitative for repeatability, and develop an off-process process for deals that have some feature you didn’t expect. This way you won’t spin your wheels working on the inevitable weird thing that emerges in diligence.

Tip: Widen the aperture at first for learning. Build flex and cushion in, but be ready to tighten up to avoid losses.

Remember: If it seems like this is mostly obvious, it’s because it is. There’s no magic in diligence; It's systematic. It’s also the step where most deals get hung up and languish, as weird facts emerge that leave investors scratching their heads. In my experience, having a framework and a process helps move past those weird facts to a decision.

Here’s hoping that was helpful. Tune in next time for frameworks useful for testing your process in the market!


Feel free to hit reply if you have questions, comments, or disagree with what I’m sharing. Happy deal-making!