How to analyse a company before investing
An eight-step method for examining a private company, from the team to the terms of the deal.
Investing in a private company calls for a more personal analysis than on the stock market: there are no financial analysts, no reference price, and the information available depends entirely on what the company discloses. Here is an eight-step method, to be followed in order.
The team
Do the managers have experience of what they are setting out to do? Are they committed full time? Who really makes the decisions?
The problem and the market
Is the problem real and costly for customers? Is the market estimated with a credible method, or with a market research figure that comes out of nowhere?
The product
Does it work? Is it used? What makes it hard to copy?
Traction
Are customers paying? Since when? Do they stay? Is growth steady, or driven by one-off events?
The business model
How does the company make money, with what margin, and when will it be profitable?
The financials
How many months of cash? How much debt? Is the forecast based on assumptions consistent with the actual track record?
The terms of the deal
Valuation, rights attached to the securities, fees, use of funds, dilutive instruments already in place.
The risks and the exit
What are the main risks, as identified by the company itself? What exit scenarios can be envisaged? None of them is certain.
Warning signs
- Figures with no source or time period.
- A valuation with no figures to back it up.
- Promises of returns on an equity stake — no serious professional makes them.
- A strong, unexplained dependence on a single customer or a single person.
- Evasive answers about cash or ongoing disputes.
This eight-step method structures your conversation with the founder as much as your reading of the file. Our due diligence checklist turns it into 30 points, with the documents to request for each one.