In an earlier post, I wrote that an investment memo is “a very useful tool to help collect your thoughts in advance of an investment decision. It’s basically a document that summarizes the important factors which help inform an investment decision.”
I also wrote that, “if you’ve done your research and thought about the startup at length, 2 to 3 pages of crisp text written in half a day is all it takes.”
In other words, the investment memo doesn’t need to be long. The reason for this is that if you’re sufficiently well informed about a company and its market, you know which factors are important for your investment decision and which aren’t.
The same is true for due diligence (DD) questionnaires. A DD questionnaire is a document that an investor sends to a company to gain a deep understanding of how the business works, its team, historical performance, and the proposed transaction, with the goal of developing an informed view on the company’s likely future trajectory. The DD questionnaire is usually sent after one or several meetings with the company.
Similar to the investment memo, a DD questionnaire can be very long. I’ve seen DD questionnaires that are over 10 pages long.
However, very long DD questionnaires usually reflect the fact that the investor hasn’t researched and thought about the business at sufficient length to parse which factors will ultimately determine the success of the company and which won’t. As a result, they look for the sense of comfort that comes from feeling like they’ve covered all the bases by asking every possible question. While this provides short-term comfort, it doesn’t contribute to producing the informed investment decision which increases the investor’s probability of making the right investment that gives them long-term comfort.
If you’ve thought about which factors will ultimately determine the success of a company and which you can ignore, a 2 to 3 page DD questionnaire is all you need.