Founder Playbook: The VC Deal Diligence Process

Alpaca VC

September 30, 2020

The Alpaca team has spent years iterating on our process with the goal of ensuring consistency, efficiency, and accuracy.

In an effort to make the deal process more transparent for founders and to spark discussion among VCs, we’ve decided to lay out the specifics of our deal process in this post.

The Traditional Diligence Process

At the highest level, the success of a venture fund depends on two things:

1) The quality and breadth of deals it sees (the top of the funnel).

2) Its ability to invest in the best deals among those it sees.

The top of the funnel is often dictated by a firm’s reputation and the personal networks of its partners.

Deal selection, on the other hand, is dictated by experience in pattern-recognition and the implementation of an effective, repeatable deal process.

Both are critical to a fund’s success though vary significantly in their drivers. There is a myriad of variations in how firms structure their analysis to ultimately identify companies they will invest in, but a basic process is usually something like this:

Common Pitfalls

In reality, however, the deal process is less straightforward than it might seem from those steps, and even the most well-intentioned processes are often ripe with issues. Some common pitfalls include:

  • Inconsistent/biased evaluation: Take the simple case where there is an optimist and a pessimist at the same VC firm. These two people will analyze the same deal very differently, leading an investment committee to conclude that the optimist’s deal is a better one than the pessimist’s, when in fact they are identical. Good venture firms have standardized processes in place that mitigate individual bias.
  • No measurement or historical record: Without quantifying deals across a standard set of factors, it is extremely difficult to accurately compare one deal to another, let alone one year of deals to another.
  • Boiling the ocean: When there are an endless number of performance metrics and business characteristics to analyze, it’s easy to boil the ocean. By focusing on everything, however, you actually focus on nothing. The deal not only moves too slowly but you’ll likely end up with a shallow analysis on the most critical points.
  • Misaligned incentives: Some VCs financially incentivize investors based on the deals that they source. This can be problematic for obvious reasons, as it means that each member of the team is not equally incentivized to put the work in on each company.
  • Seniority dictates decisions: There’s no better way to lead the witness than to have the partners at a firm voice their opinions on a deal, and then ask the junior team members what they think. Even the most independent thinkers may soften opinions in this circumstance.

The Alpaca Diligence Process

To ensure that each company we see is effectively evaluated, we employ a data-driven process that leverages the knowledge of our broader team and includes proprietary frameworks such as our 19-factor matrix/investment scorecard (highlighted in blue) to avoid these pitfalls.

Forming The 19-Factor Matrix

Our 19-Factor Matrix (pictured below) provides a framework to track and determine when we have enough information in each of the 19 categories. This allows us to be efficient with time and create a standardized scoring process.

The matrix is broken down into four key categories, ordered from highest to lowest weighting: team, market, product, and deal dynamics.

Each of these categories have several key factors, which we evaluate individually by assigning one of three levels of conviction: pending diligence, risks to accept, or confident.

This ensures we don’t have any blind spots and directs where we should invest time in the diligence process. Once all 19 factors have moved to either ‘conviction’ or ‘risk to accept’, we are ready to move on, bring the team in, and then ultimately, vote (scorecard).

Alpaca’s Investment Decision Process

Our process is built to leverage the expertise of all members of our investment team. This starts with soliciting questions from the broader team prior to the all-hands meeting with the startup.

  1. The deal lead creates an investment memo that outlines the key components of our analysis into 19 factors.
  2. Each team member reviews the investment memo and contributes questions to be discussed in the all-hands meeting with the startup team.
  3. An all-hands meeting is held with the Alpaca team and the startup’s team to dig in on our questions.
  4. Before discussing thoughts on the meeting, each team member privately fills out the initial investment scorecard, noting areas of concern to be discussed in conversation.
  5. We then briefly meet to share our scores and discuss individual areas of concern where there are large variances in score.
  6. The averaged score then goes into a database with all past deal scores. If it’s high enough, we move to the final stage with the investment committee.

In a typical process, investors who weren’t part of the deal team may never get a chance to relay their questions to the startup directly. By engaging the broader team earlier in the process, we increase diversity of thought, ultimately leading to more informed decisions.

Measuring & Voting the Investment Scorecard

The Investment Scorecard quantifies the four main categories in the matrix above, which each member of the team scores individually from 1 to 10 to arrive at an overall score for the investment opportunity. While the use of a scorecard is not uncommon across venture firms (nor are the factors we consider in each category), how we use the scorecard is.

The broader team first completes their individual scorecards privately after the all-hands. All scores are then collected, and the categories with the largest score variances become the focus of the discussion. Completing the scorecards privately leads to significantly greater divergence in opinion and is what drives some of our most fruitful discussions.

The scorecard also allows the team to conduct retrospective analysis, such as running correlations between collective team investment scores and eventual investment outcomes/exits. This creates a feedback loop that allows us to identify patterns and iterate on the process.


Just because a VC votes to invest doesn’t mean the work is done. The best deals are often very competitive and demand that a VC stand out from its peers to win the deal. Survey data tells us that early-stage founders care most about three things when deciding whose money to take: 1) personal relationship & chemistry, 2) deal terms, and 3) speed to a term sheet. We consciously designed our investment process (and firm) with this in mind.

We leverage the tools and best practices we already employ throughout the deal process and apply them to the founder experience. We collect founder feedback, we analyze our CRM data so that we know exactly how long each deal sits in the different stages of our pipeline. We track our term sheet wins and losses overtime so we know why we lost that deal.

Ie. We make our flywheel better.

We believe our process yields not only stronger financial returns over time, but also lays the groundwork for a more positive interaction with founders, regardless of the outcome. Moreover, we hope this transparency into our deal process helps both investors and founders across the board.

Stay tuned for the next chapter in this series: How to close and win the deal.