# Due Diligence Math

The first week at the VC Lab Venture Institute gave me two key insights ([detailed post](https://www.linkedin.com/posts/saalse_mondayvc-startups-investments-activity-7121875813460836352-1H4H)):

1\. **Seek opportunities for 10-100x returns**, rather than just investing in any new tech business that can earn a profit or be acquired with at least 2x returns.

2\. **1% of startups in deal flow get funded**, which requires reviewing 1000 applications to make 10 investments per year.

We all know that 90% of startups fail. Last week, 60x angel investor and LP [Rem Darbinyan](https://www.linkedin.com/in/remdarbinyan/) at [STAN](https://www.linkedin.com/company/science-and-technology-angels-network-stan/)'s webinar added an extra 6.9% which becomes self-sustaining business not giving the returns VCs need to cover failures. So basically, 3.1% of the 1% of invested startups outperform.

<figure><img src="/files/ZZGYhevap8MafSu3Ydmu" alt="" width="375"><figcaption><p>Startup Statistics: data by Rem Darbinyan, chart by Alex Samson.</p></figcaption></figure>

This means a VC has to review 3225 startup applications per year to get a chance.

I don't add here that only 10% of applications come from cold outreach, meaning that a VC has to have a strong and warm deal flow of 3225 or multiply it with cold applications.

***

Let's omit from today's math the time required for screening and scoring deal flow to get 10% picked for due diligence (DD).

One investment requires 10 DDs. To get one outlier startup in the portfolio per year, a VC has to conduct DD on 323 startups per year, or 6 startups per week without vacations.

With my tech and new market due diligence, which takes one intensive week, I will need six years to invest in a super opportunity.

### How can emerging VCs address the due diligence swamp? <a href="#ember744" id="ember744"></a>

Or how to explain the DD strategy to an LP who can do the math.

No way:

1. **🦮 Don't do due diligence, blindly follow top-tier VCs:** Not much sense for LPs to invest in an emerging VC rather than directly in a top-tier VC.
2. **🎸 Get together with 6 active GPs**: An option, but management risks with such a boys/girl band founding team size.
3. 🧐 **Hire 6 analysts**: Let's take a $120K annual salary per each, which means $720K per team. With a 2% management fee, this requires $36M for Fund 1 capital only on the DD team. Not feasible.
4. 🕴️**Outsource:** Same cost as a team of 6 plus a consulting profit margin. Not feasible.

Art of Combinations:

* 🏭 [Specialize in an industry/market to have metrics and access](https://www.linkedin.com/posts/saalse_mondayvc-marketsize-biotech-activity-7183139248735240193-de6_) (post)
* 🗓️ **Do DD week by week** to increase productivity.
* 🤝 **Have a team** with a few GPs, VPs, and associates.
* 🐢 **Reduce expectations** to have 1 outlier startup every 2 or 3 years.
* 🦮 **Follow top-tier VCs** sometimes.


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