Kyle Harrison
frameworks

Investment Frameworks

A curated library of investment frameworks and checklists from leading investors, VCs, and fund managers — covering everything from startup metrics to public market valuation.

A curated library of investment frameworks, checklists, and mental models from leading investors across venture capital and public markets. Organized by source. See also Networked Conviction — Roam + Investing for process notes on how Kyle uses these frameworks.

a16z’s “16 Startup Metrics”

Source

  • Bookings vs. Revenue
  • Recurring Revenue vs. Total Revenue
  • Gross Profit
  • Total Contract Value (TCV) vs. Annual Contract Value (ACV)
  • Life Time Value (LTV)
  • Gross Merchandise Volume (GMV) vs. Revenue
  • Unearned or Deferred Revenue vs. Billings
  • Customer Acquisition Cost (CAC): Blended vs. Paid, Organic vs. Inorganic
  • Active Users (DAU, WAU, MAU)
  • Month-on-Month Growth
  • Churn
  • Burn Rate
  • Downloads
  • Cumulative Charts vs. Growth Metrics
  • Chart Tricks
  • Order of Operations

a16z’s “16 More Startup Metrics”

Source

  • Total Addressable Market (TAM)
  • ARR vs. Annual Run Rate
  • Average Revenue Per User (ARPU)
  • Gross Margins
  • Sell-Through Rates & Inventory Turns
  • Network Effects
  • Virality
  • Economies of Scale
  • Net Promoter Score
  • Cohort Analysis
  • Registered Users
  • Active Users (across social, media, e-commerce)
  • Sources of Traffic
  • Customer Concentration
  • Truncating the Y-Axis
  • Cumulative Charts, Again

a16z’s “16 Key Metrics for the Passion Economy”

Source

  • Conversion of free fans to supporters and subscribers
  • Total creators with sales (cumulative and in a given time frame)
  • Creators who have reached a certain revenue threshold
  • Gross Transaction Value or Gross Subscription Value
  • Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR)
  • Average selling price (ASP)
  • Share and sources of earnings
  • Revenue retention (creators & audience)
  • Fan engagement rate
  • Loyalty and retention of fans
  • Creator retention and churn
  • The Flywheel: Percentage of fans that become creators, creators bringing new creators, fans bringing new fans
  • Creator affinity and value
  • Acquisition costs and channels for creators and users
  • Intra-audience interactions
  • Network effects

Aaron Neil’s “How To Think” Framework

How to Think About a Company

  • Who is target customer (big corps, mom & pops)?
  • What exactly they are disrupting: what the traditional business model is and how this company is changing that? How are they disrupting? Are they working directly against the legacy players or working with the legacy players to complement them?
  • Are they improving efficiency in the industry – how?
  • Pricing?
  • Logistics on exactly how the business works: profit, major costs, KPIs
  • What is the customer experience: what does the business look like from the customer’s POV from initial contact to first sale to retention?
  • Customer retention?
  • Business model in terms of revenue: SaaS, take rate, advertising, etc.?
  • Founder, current CEO (if not founder), key management credentials/performance at past companies
  • Is the company delivering on previous projections? Do future projections make sense?
  • Is this a sustainable business (i.e., can they survive without VC money)?
  • Is this business integral to the customer?
  • What is their value-add?
  • How reliable/predictable is their revenue?
  • Spend time using the product: how do you like it?
  • How can this business scale?
  • Look at ancillary revenue streams: should the business spend more/less time here?
  • Geographical coverage?
  • Vertical vs. horizontal expansion opportunities?
  • Is this business a means to a larger business (e.g., Netflix renting DVDs to get into streaming space)?
  • What is the company doing with new investor capital?
  • Dissect the company’s costs. What exactly is baked into each cost line and how are those going to change as the company grows?
  • What are the primary geographies the company operates in? How penetrated are these? What other geographical markets can the company penetrate?

How to Think About an Industry

  • Competitors?
  • Find metrics companies in the industry are evaluated on. How does this company compare?
  • Traditional business model?
  • Does our company have a competitive advantage?
  • Macro/non-fundamental events headwinds and/or tailwinds
  • Industry growth stage: any proven winners, consolidation, etc.?
  • Addressable market CAGR?
  • Barriers to entry/exit?
  • Is this a winner take all market? Will this company be the winner and therefore a monopoly?

How to Think About Valuation

  • What are the possible outcomes? Bear? Base? Bull?
  • Potential exit opportunities/when? (IPO, strategic private, PE shop, etc.)
  • What are the three main drivers of the financial statements? Focus on those.

Baillie Gifford’s 10 Question Stock Research Framework

Source

Industry Background

  • Is there room to at least double sales over the next 5 years?
  • What happens over ten years and beyond?

Competitive Advantage

  • What is your competitive advantage?
  • Is your business culture clearly differentiated? Is it adaptable?
  • Why do your customers like you? How do you contribute to society?

Financial Strength

  • Are your returns worthwhile?
  • Will they rise or fall?

Management Attitudes

  • How do you deploy capital?

Valuation

  • How could it be worth five times as much, or more?
  • Why doesn’t the market realize this?

Bijan Sabet’s Checklist

  • Are the founders extraordinary?
  • Do I love the product?
  • Is the vision compelling?
  • If I wasn’t a VC, would I want to work for the founders at the startup?

Bill Ackman & Pershing Square Principles

  • Simple
  • Predictable
  • Free cash flow generative
  • Strong profit-growth potential
  • Scarcity value
  • Dominant player
  • Competitive moat
  • Large barriers to entry
  • Earning high returns on capital
  • Limited exposure to extrinsic risks
  • Strong balance sheet
  • No need for capital to survive
  • Excellent management
  • Good governance

Bill Gurley: Effectiveness of an Online Marketplace

Source

  • New Experience vs. The Status Quo
  • Economic Advantage vs. The Status Quo
  • Opportunity for Technology to Add Value
  • Fragmentation of Suppliers
  • Friction of Supplier Sign-Up
  • Size of Market Opportunity
  • Expand the Market
  • Frequency
  • Payment Flow
  • Network Effects

Brian Feroldi’s Investment Checklist & Gauntlet

Source

Checklist

Financials:

  • Financial Resilience: Balance sheet strength that could survive an industry downturn. Score 0–5.
  • Gross margin: >80% = 3 pts. 50–80% = 1–2. Below 50% = 0. Max 3.
  • Return on equity: >20% = 3 pts. 10–20% = 1–2. Below 10% = 0. Max 3.
  • Free cash flow: Positive and growing rapidly = 3. Negative = 0. Max 3.
  • Earnings per share: Positive and growing >15% = 3. Negative = 0. Max 3.

Moat:

  • Network effect: True network effect (like Facebook, not like Western Union). Max 15.
  • Switching costs: Painful in terms of time, cost, or training to leave. Max 15.
  • Durable cost advantage: Scale, physical location, vertical integration, distribution. Max 15.
  • Intangibles: Premium brand, long-lived patent, government license. Max 15.
  • Moat direction: Widening = 5. Stable = 2–3. Weakening = 0. Max 5.

Potential:

  • Optionality: Multiple futures, potential to enter new markets. Max 7.
  • Organic growth runway: Already captured ~1% of market. Max 4.
  • Top dog and first mover in important, emerging industry. Max 3.
  • Operating leverage ahead: Scaling margins. Max 4.

Customers:

  • Acquisition: Word-of-mouth preferred; low CAC. Max 5.
  • Dependence: Recession-proof demand. Max 5.

Company-specific factors:

  • Recurring revenue: Razor/blade, consumables, subscription. Max 5.
  • Pricing power: Can raise prices without losing customers. Max 5.

Management & Culture:

  • Soul in the game: Founder/family or long-tenured CEO. Max 4.
  • Insider ownership: Significant net worth tied to the business. Max 3.
  • Glassdoor ratings: Overall >4, CEO approval >80%, recommend to friend >80%. Max 4.
  • Mission statement: Purpose beyond making money; simple and inspirational. Max 3.

Stock:

  • Performance: Beaten market by 100%+ over 5 years. Max 4.
  • Shareholder friendly actions: Rising dividend, buybacks, debt paydown. Max 3.
  • Consistently beats expectations: Award 1 pt per beat in last 4 quarters. Max 4.

The Gauntlet (deductions)

  • Customer concentration: >20% single customer = -5. Several customers >10% = -2 to -4. No risk = 0.
  • Industry disruption: Facing an Arista = -5. Some risk = -3. No risk = 0.
  • Outside factors: Success depends on commodity prices, interest rates, government, etc. = -3 to -5.
  • Big market loser: Stock lost to market by >100% over 5 years = -5.
  • Growth by acquisition only: = -4. Bolsters organic growth = -2.
  • Binary event: Major legal/FDA ruling could destroy the thesis = -5.
  • Extreme dilution: Share count rising >5% annually from SBC = -4. 3–5% = -2.
  • Complicated financial statements: Can’t understand the financials = -3.
  • Antitrust concerns: So dominant regulators may act = -3.
  • Headquarters: China = -3. Israel = -2. Non-US developed = -1. US = 0.
  • Currency risk: >66% of sales outside US = -2. >33% = -1.

Bruce Berkowitz’s Basic Checklist

  • Can you kill the investment? Is there adult supervision at the company?
  • Is the company essential? Does it depend upon the kindness of strangers?
  • What can the company make? Reasonable profitability for owners?
  • How are owners paid? Distributions?
  • Management — honest in past and present?
  • Does accounting reflect reality?
  • Does the balance sheet match up with the income statement?
  • Catalysts — Buybacks? Misunderstood? Is enterprise having a big problem that is fixable?
  • Are there irrational fears of current headwinds?
  • Does the business have pricing power or unit growth?
  • Can you hold the investment for a long time & does it improve portfolio performance?

Charlie Munger’s Checklist

See also Poor Charlie’s Almanack

  • Can you understand the business? Is it in your circle of competence? (Avoid industries where you know little — e.g. technology, biotech)
  • Does the business have a moat? Does it have a durable competitive advantage? (Avoid perfectly competitive and high fixed cost industries)
  • Does it have managers who behave as owners and are wise capital allocators?
  • Do insiders own their own stock and are they buying back shares?
  • Does the company have a lot of debt? Any long list of numbers multiplied by zero is always zero.

Chase Coleman at Tiger Global Management on Managing an Investment Portfolio

  • Maintain a simple investment philosophy and adhere to it at all times. At Tiger Global, we seek to buy high-quality companies at attractive multiples of future free cash flow run by talented, shareholder-oriented management teams. Occasionally, we will purchase shares in a mediocre business trading at a steep discount to intrinsic value.
  • The best risk management occurs at the individual idea level, assuming that the overall portfolio is well-hedged, not over-leveraged, and reasonably diversified. Considerations:
    • Counterparty exposure is extremely important.
    • Managing a portfolio with negative net exposure can be risky.
    • Asset-based exposure analysis at the portfolio level can be helpful.
    • Concentration in sectors with significant political, interest rate, or commodity price risk requires careful forethought.
    • Be patient and resist the temptation to shorten your time horizon. “When everyone is compressing their time horizon, you should lengthen yours.” — John Griffin
  • Valuations matter, a lot. Even the worst company in the world is attractive at some price; the best should be sold at the wrong valuation.
  • Maintain a healthy level of organizational paranoia. Question your assumptions, understand the risks, be willing to transition when you “just don’t know.” If and when you believe you are wrong, do not incrementalize — move on quickly.
  • Be aggressive when you find highly asymmetric risk/reward opportunities. There is no better feeling than being early, being big, and being right.

Coatue Framework

  • Team
  • TAM
  • Traction
  • (+) Trend

Daegwon Chae, Partner at Bond

  • Is this a vertical that will experience 30%+ CAGR over time?
  • Is this a growth stage investment that has the potential to generate venture-scale returns (e.g., generational business)?
  • Is this business highly cash-intensive? If so, do they have high LTV and short payback periods?
  • Is this a controversial investment among your team? Consensus is priced in.

David Einhorn’s Checklist

  • What are the economics of the business?
  • How do the economics compare to the reported earnings?
  • How are the interests of the decision makers aligned with investors?

Don Valentine’s Original Question

  • Why should I care about this?

DST Global 3 Core Elements

  • Team
  • TAM
  • Traction

Future Ventures Key Questions

  • Is this company the first of their kind?
  • Are they competing or are they creating a category?

G Squared Land and Expand

  • Are customers highly engaged? (Low churn for SaaS; high MAU % for consumer)
  • Can the company monetize its users over time? (High net dollar retention; rising ARPU)
  • Are unit economics positive? (LTV:CAC of ~3x or greater)
  • Is there a path to profitability within 3 years of investing?
  • Does the company have a strong management team?
  • Have they brought on solid investor syndicates and board members?
  • Is the business capital efficient?
  • Are gross margins high? Do they have ability to improve over time?
  • Does the business have strong network effects?
  • Does the business have recurring revenue?
  • Does the business have high switching costs?
  • Does the business have economies of scale?
  • Does the business have a trusted brand / superior product?
  • Is the TAM large and growing?
  • Does the business have a competitive moat and breaking away as a category leader?
  • Are there multiple competitors who are also growing and venture-backed?
  • Is there a 2–3x base case return within 3 years with a downside case that still yields a full return of capital?

In Practise Primary Research Checklist (For Interviews)

Source

Pre-interview

Business Analysis

  • Do I understand how this business fits into the wider value chain? Who has power in the value chain?
  • Have I written down in simple sentences what I believe are the core drivers of intrinsic value? What else do I think is important?
  • Do I understand what I don’t know?
  • What information and metrics are reported? What is missing from the company filings?
  • Do I understand the economics of one unit? CLTV? Revenue, fixed and variable costs per unit?
  • Do I understand the bull and bear arguments for the company?

Executive Analysis

  • Do I know exactly how the executive spent their day-to-day at the company?
  • What were their key responsibilities and who did they report to?
  • What exactly is the executive’s circle of competence?
  • How did they rise through the ranks of the business?
  • What kind of operator is this executive? Do they understand the company from a shareholder’s perspective?
  • What is the executive’s worldview?
  • On what terms is the executive with current management? Still a shareholder? Fired?

Interview

Building trust

  • Have I sent the executive questions in advance?
  • Does the executive understand who I am and what I’m trying to achieve?
  • How do I build trust and respect with this particular executive?
  • Which questions will the executive be least comfortable addressing and why?
  • How do I sequence the questions most effectively?
  • How could I get a sense of the integrity of the executive’s opinions?

Asking questions

  • Why does this question really matter?
  • What assumptions am I making by asking this question?
  • What is the most effective line of questioning? Open-ended, indirect, direct, or a “dumb” question?
  • Am I pushing my own agenda with this question?
  • Is there a simpler way to ask the question?
  • How am I structuring the question? Is it closed? How could it be more open?
  • If the executive answers X to Y question, what are the second and third-order effects of X?

Post-interview

Synthesis

  • How does my assumptions of the core drivers align with what the executive thinks really matters?
  • What new information or facts about the company did I learn?
  • What opinions did the executive have about the core drivers? How do these compare with consensus?
  • How could the biases of the executive influence their view? How should I handicap their opinions?

Further research

  • Do I know what is important and not important?
  • How do I gather insight on what I know is important but I still don’t know?
  • Am I looking in the right place for insight on the key drivers?
  • Which type of person could sense-check or provide a different perspective?

Jared Sleeper’s “Getting Up To Speed” Process

  • Review past notes
  • Understand pricing
  • Identify top competitors
  • Read latest transcript Q&A
  • Check Glassdoor
  • Check G2Crowd
  • Check Google Trends
  • Other unique relevant data?
  • Review guidance vs. performance
  • Check LinkedIn hiring
  • Chat with IR
  • Make sure all the given data is in a model
  • Tune model row by row
  • Identify key drivers for revenue modeling
  • TAM Analysis
  • Write down key questions
  • Key people and impressions
  • Trading dynamics — share structure/lock-up, etc.
  • What would be a unique way to get familiar / deep here?
  • Watch a demo and/or demo the product

Joe Coster’s Final Decision Checklist

Source

  • Are you tired?
  • Did you make this investment decision while the market was closed, so that current price moves aren’t impacting your judgment?
  • Have you done enough work, and are you sure this is within your circle of competence?
  • Is the balance sheet conservative to allow the company to endure even the most difficult economic environments?
  • Is the management team comprised of the kind of people you want to partner with, and are their interests clearly aligned with yours?
  • Is this a good business?
  • Do you have downside protection?
  • Do you understand price vs. value?
  • Is this business almost certain to be making more money 10 years from now?
  • Am I viewing this as a business and not just a stock?
  • Am I sizing the position appropriately?
  • No FOMO, No Sunk Costs, and No Acting Out of Boredom.

Joel Greenblatt’s Checklist

  • What are you paying? (EBIT/EV)
  • What are you getting? (Normalized EBIT / (NWC + Net Equipment))
  • What is normalized EBIT in three years?

John Rotonti’s Investing Checklist

Source

  • Does the business have a strong balance sheet, preferably with net cash?
  • Can the business generate organic revenue growth powered by a large market opportunity and/or long-term tailwinds?
  • Does the business have rising or stable margins, with particular emphasis on gross margins and NOPAT margins?
  • Can the business generate high (or increasing) ROIC and growing earnings and free cash flow?
  • Is the business led by an exceptional CEO and quality leadership team?
  • Does the business have recurring revenue and/or pricing power?
  • Does the company have a medium (or lower) risk profile?
  • Is the business executing well (experiencing strong business momentum)?
  • Is the company driven by a mission beyond maximizing profits for shareholders?
  • Does the business have multi-bagger potential?

Jonathan Tepper’s Checklist

  • Is the business simple and understandable?
  • Does the business have a consistent operating history?
  • Does the business have favorable long-term prospects?
  • Is the business simple, predictable, free-cash-flow generative, resilient and sustainable?
  • Does the business have strong profit-growth opportunities and/or scarcity value?
  • Does the business have a moat around it?
  • Is it a high-quality business that can’t blow up and should grow in value over time?
  • Is there a high profit margin (operational margin of safety)?
  • Does this have any of the following characteristics of a great business?
    • They are scarce
    • Clear and long runway of growth
    • Limited competition
    • Not capital or labor intensive
    • Minimal government involvement
    • A major plus to have a great manager
  • Who is the CEO and board? Do they have a good track record?
  • Is the management rational with its capital?
  • Has management made dumb acquisitions or issued shares below intrinsic value?
  • Do insiders own their own stock and are they buying back shares?
  • Is the focus on Return On Equity?
  • What is the rate of “owner earnings”?
  • What is the value of the business? Can it be purchased at a significant discount to its value?
  • Does the company have a lot of debt? Any long list of numbers multiplied by zero is always zero.

Lead Edge Capital 8 Criteria

  • Are you growing $10M+ in revenue?
  • Are you growing your revenue at 50% or more a year?
  • Do you have 70%+ gross margins?
  • Do you have a recurring business?
  • What is your retention? Do you have 90%+ gross retention?
  • Are you profitable or break even?
  • Do you have a diversified customer base?
  • How efficient are you with your capital? (“The world is littered with $25M software companies that have burned $60M to get there.”)

Lenny Rachitsky’s How to Kickstart and Scale a Marketplace Business

Source

Phase 1: Crack the chicken-and-egg problem

  • Constrain the marketplace
  • Decide which side of the marketplace to concentrate on
  • Drive initial supply
  • Drive initial demand

Phase 2: Scale your marketplace

  • Determine if you are supply or demand constrained
  • Scale growth levers
  • Maintain quality
  • What would you have done differently?

Phase 3: Evolve your marketplace

  • Move to a managed marketplace
  • Add new business lines

Lou Simpson’s Checklist

  • Does management have a substantial stake in the stock of the company?
  • Is management straightforward in dealings with the owners?
  • Is management willing to divest unprofitable operations?
  • Does management use excess cash to repurchase shares?

Margin of Safety Framework

  • How can the company be killed?
  • What are the biggest threats and weaknesses?
  • Does the company have a “moat” protecting its business?

Mark Vukich’s Prompting Questions Framework

General Business

  • Is this a good business?
  • What are the key success factors to superior performance in this industry?
  • Define the market opportunity. How do competitive products address it?
  • What are the barriers to entry (“moats”)?
  • What is the relative power of customers, suppliers, competitors, regulators?
  • Who controls industry pricing? Does the company/sector have pricing power?
  • How much can a good company differentiate itself from a bad one in this industry?
  • Do you understand this business? Describe it to a ten year old.

Evaluating Management

  • Is the company’s leadership honest? Do they demonstrate integrity?
  • Is there a lot of employee turnover? How are employees treated?
  • What are the employees’ incentives?
  • Is the executive leadership incentivized for the long-term?
  • What is their background, and what do their former colleagues say about them?
  • How are they compensated? Are their interests aligned with shareholders?
  • Have they been good at allocating capital?
  • Are they buying or selling stock?

Business Model

  • What is the selling model: razor/blades? services? one-off contracts?
  • What are the economics of the base business unit vs. competitors?
  • Why is the company good (or bad) at what they do? Can they sustain it?
  • Is this company growing by acquisition? How sustainable is that?
  • Be able to easily describe the entire sales process — from order to fulfillment.

Company Culture

  • Is this a great company? Is it built to last?
  • Can you imagine holding stock in this company for twenty years?
  • If you had unlimited capital, how would you feel about your chances of competing against this company?
  • Compare to a weak competitor. What is the difference and why?

Financial

  • What are the company’s capital requirements and cash flow characteristics?
  • How visible are earnings quarter-to-quarter and year-to-year?
  • Is this a fixed or variable cost business? How much cost leverage?
  • Do earnings grow as a function of unit sales growth, price increases, or margin improvement?

Valuation

  • Enterprise Value/EBITDA
  • What are the company’s growth rates in terms of earnings, EBITDA, and FCF?
  • What has to go right, and where is the most chance for surprise?
  • What are the relevant precedent transactions?

Risks

  • What are the big unknowns? How much can the company control/influence these risks?
  • What could cause this investment to be a total disaster? How bad could it be?
  • What good news and bad news will affect the company in the coming year?

Michael Shearn’s “Investment Checklist”

Basics

  • Do I want to learn more about this business?
  • How would you evaluate this business if you became CEO?
  • Describe how the business operates. How does it make money?
  • How has it changed over time? What countries does it operate in?

Customer

  • Who is the core customer? What is customer concentration?
  • Is it an easy or hard sell? What is the customer retention rate?
  • Is the business customer-oriented? What pain is alleviated for the customer?
  • Is the customer dependent on the business? If it disappeared, would customers care?

Business

  • Sustainable competitive advantage? Source? Pricing power? Good or bad industry?
  • How has the industry evolved? What is the competitive landscape?
  • How intense is the competition? Good supplier relationship?

Financials

  • What are the business fundamentals? What metrics matter most?
  • What are the key risks? How does inflation affect the business?
  • Is the balance sheet strong or weak? What is ROIC?

Cash Flow

  • Accounting standards: conservative or liberal?
  • Is revenue recurring? Cyclical, countercyclical, or recession-resistant?
  • Operating leverage? Working capital affect cash flow? High or low capex?

Management

  • What type of manager is the CEO? A lion or a hyena?
  • How did the CEO rise to lead the business?
  • How are senior managers compensated? Have they been buying or selling the stock?
  • Does the CEO consider all stakeholders? Value employees? Hire well?
  • Cutting unnecessary costs? Disciplined capital-allocation decisions? Buy back stock?
  • Does the CEO love money or love the business? Have integrity? Good communicator?
  • Is the CEO an independent thinker? Self-promoting?

Growth Potential

  • Organic or M&A? What is the motivation to grow?
  • Has historical growth been profitable? Can it continue?
  • Favorable growth prospects? Growing too quickly or at a steady pace?

M&A

  • How does management make M&A decisions? Have past acquisitions been successful?

Patrick Gregory’s Investment Checklist

Source

  • Is this idea within my circle of competence?
  • What are the 1–3 main things that will drive the business, and what data can I use to track them?
  • What is the secular growth potential? Consider the size and growth of end markets.
  • What defines the quality of the business (brand awareness, customer loyalty, pricing control, cost advantages)?
  • Is there some element of defensiveness (brand strength, IP, regulatory environment, scale, switching costs, network effect)?
  • How capable is management? Do they have a commitment to enhancing shareholder value?
  • What is management doing to position the company for the future?
  • Does the company earn high ROIC?
  • Does the company have a long runway of reinvestment prospects and a moat to protect returns?
  • Is it a capital intensive business?
  • Is the balance sheet structured to allow the company to take advantage of unforeseen opportunities?
  • Are there any off-balance sheet liabilities?
  • Are there any potentially disruptive technologies?
  • Is it trading at a good price? What is the downside to your worst case scenario? Is there a case for a 26% IRR (double in 3 years)?
  • What are the catalysts for value creation?
  • How long do you anticipate holding the stock?
  • If you ultimately have to get out, what’s the likely reason you were wrong?

Phil Fisher’s 15 Questions

  • Does the company have products/services with sufficient market potential to make possible a sizable increase in sales for at least several years?
  • Does the management have a determination to continue to develop products or processes that will further increase sales when current product lines have been exploited?
  • How effective are the company’s R&D efforts in relation to its size?
  • Does the company have an above-average sales organization?
  • Does the company have a worthwhile profit margin? What is the company doing to maintain or improve profit margins?
  • Does the company have outstanding labor and personnel relations?
  • Does the company have outstanding executive relations?
  • Does the company have depth to its management?
  • How good are the company’s cost analysis and accounting controls?
  • Are there other aspects of the business, somewhat peculiar to the industry, which will give the investor important clues?
  • Does the company have a short range or long range outlook in regards to profits?
  • In the foreseeable future, will growth require sufficient equity financing to largely cancel the benefit of anticipated growth?
  • Does the management talk freely to investors about its affairs when things are going well but “clam up” when troubles occur?
  • Does the company have a management of unquestionable integrity?

Marc Andreessen (pmarca)‘s “Layers of Risk for a High-Tech Startup”

Source

  • Founder risk: Does the startup have the right founding team? (Great technologist + person who can run the company)
  • Market risk: Is there a market for the product? Will anyone want it? Will they pay? How much?
  • Competition risk: Are there too many other startups doing this? Is this startup sufficiently differentiated?
  • Timing risk: Is it too early? Is it too late?
  • Financing risk: How many additional rounds will be required? What will the dollar total be?
  • Marketing risk: Will this startup be able to cut through the noise? Do the economics of customer acquisition work?
  • Distribution risk: Does this startup need certain distribution partners to succeed? Will it be able to get them?
  • Technology risk: Can the product be built? Does it involve fundamental breakthroughs that need to happen?
  • Product risk: Even assuming the product can in theory be built, can this team build it?
  • Hiring risk: What positions does the startup need to hire for to execute its plan?
  • Location risk: Where is the startup located? Can it hire the right talent?

Porter’s Five Forces

  • Threat of new entrants
  • Threat of substitute products or services
  • Bargaining power of customers (buyers)
  • Bargaining power of suppliers
  • Intensity of competitive rivalry

Porter’s Economic Franchise

  • Is it needed or desired?
  • Is it thought by its customers to have no clear substitute?
  • Is it not subject to price regulation?

Richard Chu’s SaaS Investment Checklist

  • Category leader (dominates a niche — see Gartner/Forrester)
  • Recurring revenue (high visibility SaaS model)
  • Large and growing TAM vs. market share (>$2B market cap, potential to 2–3x over 3 years)
  • Defensible moat (network effects, branding, IP, partnerships, distribution channels, switching costs, economies of scale, barriers to entry)
  • High gross margins (>70%) and organic revenue growth (>40%)
  • High DBNER (>120%) and gross retention rate (>90%)
  • Progress towards profitability (improving non-GAAP gross and operating margins)
  • Focused, mission-driven company culture (4/5+ Glassdoor rating?)
  • Founder CEO, experienced management, high insider ownership
  • Rapid customer growth with fast sales cycles (preferably bottom-up/land and expand)
  • Diversified customer base (strong pricing power, few dependencies)
  • Optionality and rapid product development (creating a platform/ecosystem?)
  • User satisfaction/mindshare (external job postings, reviews, conferences)
  • Valuation (sustainable multiple with opportunity for expansion?)
  • Geographic/industry familiarity
  • Technical indicators (healthy relative strength, accumulation/distribution, moving averages trending up)

Ryan Reeve’s “Business Resilience Checklist”

Business Resilience

  • Low sales and marketing expenses (word of mouth or strong DTC distribution)
  • Vertically integrated control of the value chain
  • Low customer or supplier concentration
  • Do the products and services help customers cut costs?
  • How long does it take for the customer to figure out the value proposition?

Financial Strength

  • Lots of cash
  • Free cash flow positive
  • Strong growth (shows demand for the product)

Management

  • Long term vision
  • Rate of innovation
  • Skin in the game
  • Founder?
  • Degree of customer obsession
  • Mount Rushmore leaders (h/t Michael Shearn)
  • Rarely talk about selling, just problem solving

Ryan Reeve’s Investment Checklist

Disqualifiers

  • Am I interested in learning more about this company?

Important

  • Is it in my circle of competence? (Do I know the business model, the industry, and two or three very important metrics?)
  • Clear thesis: why do I think this company will be a good stock?

Moat

  • Why is the company better than all the competition? (Leader, business momentum, competitive advantages)
  • How do you think about future-proofing and optionality?
  • What is the value proposition? How much value are they providing?
  • What is the culture of the company like? How do they treat employees? (Check Glassdoor)

Management

  • Insider ownership and other smart investors?
  • Founder led?
  • Culture of innovation? Long term view? Recent new products?

Financials

  • Revenue growth, margin expansion, operating cash flow (FCF margins), ROIC
  • Capital structure, too much debt? Diluting a lot?
  • Total addressable market; how well do you know the industry?

Biases

  • Do I like this just because I have spent a lot of time researching it?
  • Do I like it just because it is down a lot from a high?
  • Is this the absolute best choice I can make or am I di-worsifying?
  • Am I seeking to find reasons to like this company rather than just letting the facts speak?

Valuation

  • How confident am I in the assumption of getting a 5-year 20% CAGR?

Allocation

  • What is my gut-level conviction and the upside potential?

Pre-Mortem

  • If this turns out to be a bad investment, what will be the reason?

Sam Altman’s “How To Invest In Startups”

Source

  • Identify who is great before they are
  • Is the person improving at a noticeable rate?
  • Would you work for the founder?
  • Can you imagine the founder taking over the industry?
  • Is the founder fast-moving and certain to be successful?
  • Are the founders scrappy and formidable at the same time; mission-oriented, obsessed with their companies, relentless, and determined; extremely smart; decisive, fast-moving, and willful; courageous, high-conviction, and willing to be misunderstood; strong communicators and infectious evangelists; and capable of becoming tough and ambitious?
  • Can costs be low and cycles fast?
  • Are network effects involved?
  • Does the industry have a rapid rate of change?
  • What can be the growth rate and eventual size of the market?
  • Is this a real trend? Do the few users use the platform a lot and love it?
  • Is it riding the wave of a new, important and rapidly growing platform?
  • Is the product so good people spontaneously tell their friends about it?
  • Is the product fundamentally new or 10x better?
  • Does the mission attract talented people around the startup?
  • Are you being seduced by a good idea pushed by bad founders?
  • Are you chasing this investment because other investors like it?

Seilern’s 10 Golden Indicators

Source

  • Scalable Business
  • Superior Industry Growth
  • Consistent Industry Leadership
  • Sustainable Competitive Advantage
  • Strong Organic Growth
  • Wide Geographic & Customer Diversification
  • Asset Light & Profitable
  • Solid Financial Position
  • Transparent Accounts
  • Excellent Management & Corporate Governance

Sequoia’s Original Checklist

  • Must be in a very large market
  • Must be in NorCal
  • Must be an advanced technology
  • Must have high gross margin ability
  • Must have the potential for Sequoia to make $100M on the single investment
  • Must be positively responsive to our active participation

Tiger Management Research Framework

Industry Study

  • Is this a good business? What are the key success factors to superior performance in this industry?
  • Define the market opportunity. How do competitive products address it?
  • What are the barriers to entry (“moats”)?
  • What is the relative power of customers, suppliers, competitors, regulators?
  • Who controls industry pricing? Does the company/sector have pricing power?
  • How much can a good company differentiate itself from a bad one in this industry?
  • Describe it to a ten year old.

Business Model

  • What is the selling model: razor/blades? services? one-off contracts?
  • What are the economics of the base business unit vs. competitors?
  • Why is the company good (or bad) at what they do? Can they sustain it?
  • Is this company growing by acquisition? How sustainable is that?
  • Describe the entire sales process — from order to fulfillment.

Management

  • What is their background, and what do former colleagues, investors, classmates say about them?
  • Have they been successful in the past? (Very important)
  • How are they compensated? Are their interests aligned with shareholders?
  • Have they been good at allocating capital?
  • Are they buying or selling stock? How much as a percentage of their holdings, and why?

Company/Cultural Issues

  • Is this a great company? Is it built to last? What could change this assessment?
  • Can you imagine holding stock in this company for twenty years?
  • If you had unlimited capital, how would you feel about your chances of competing against this company?
  • Compare to a weak competitor in the same industry. What is the difference and why?

Balance Sheet

  • What is the company’s capital structure and how does it compare to peers?
  • What are the trends in inventory turns, days payable/receivable, and working capital?
  • What are its coverage ratios on interest payments?

Cash Flow

  • What are the company’s capital requirements and cash flow characteristics?
  • How is the company choosing to invest its capital? CapEx? Buybacks? Acquisitions?
  • Does the company need to access the capital markets? How soon/often?

Earnings/Profitability

  • How visible are earnings quarter-to-quarter and year-to-year?
  • Is this a fixed or variable cost business? How much cost leverage?
  • Do earnings grow as a function of unit sales growth, price increases, or margin improvement?

Valuation

  • Market Value/Earnings, Enterprise Value/EBITDA, FCF Yield, Market Value/Sales
  • What are consensus earnings estimates vs. your own expectations?
  • What are key leverage points in our own and the street’s earnings models?
  • What has to go right, and where is most chance for surprise?
  • Are accounting policies conservative and in line with peers?

Risks

  • What are the big unknowns? How much can the company control/influence these risks?
  • What could cause this investment to be a total disaster? How bad could it be?

Other (Timeline/timing issues — DO A TIMELINE!)

  • What are the catalysts for the company’s proper valuation to be realized?
  • What good news and bad news will affect the company in the coming year?
  • Who owns the stock? Momentum funds? Big mutuals? Hedge funds?
  • How difficult is it to build a significant position (float, volume)?
  • Draw a timeline of expected events and dates. What might go wrong and when?

Tom Murphy’s Checklist

  • Scarcity value
  • Clear and long runway of growth
  • Limited competition
  • Not capital or labor intensive
  • Minimal government involvement
  • A major plus to have a great manager

Warren Buffett’s Checklist

  • Is the business simple and understandable?
  • Does the business have a consistent operating history?
  • Does the business have favorable long-term prospects?
  • Is management rational with its capital?
  • Is management candid with the shareholders?
  • Does management resist the “institutional imperative”? (Do they avoid groupthink?)
  • Is the focus return on equity?
  • What is the rate of “owner earnings”? (FCF over a defined period)
  • Is there a high profit margin?
  • Has the company created $1 of market value for every $1 retained?
  • Financial analysis: Focus on return on equity, free cash flow, high profit margins, and how good the company will be in 10 years vs. competition.
  • What is the value of the business?
  • Can the company be purchased at a significant discount to its value?

Miscellaneous / Relative Value

  • Is the product 10x cheaper or better than what exists?
  • Is this an aspirin or a vitamin?
  • What business metrics do they track on their dashboard?
  • How did you come up with those metrics? Why are they more important than others?
  • Where could this investment go wrong?