Due Diligence Results in Saved Investment 

Levreg Partners, in collaboration with a prominent venture capital (VC) firm, undertook an extensive due diligence process to evaluate a promising new consumer goods app. The app, designed to revolutionize the way consumers discover and purchase products, showcased significant potential. However, before making a substantial investment, the VC firm sought our expertise to perform a thorough assessment of the start-up's operational strengths, weaknesses, investment risks, potential issues, and upside.

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Our due diligence process was structured into three main phases: operational assessment, risk evaluation, and investment potential analysis. Each phase involved meticulous examination and analysis to provide a comprehensive overview of the start-up.

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1. Operational Assessment:

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• Team Evaluation: We conducted in-depth interviews with the management team to understand their experience, capabilities, and vision. The team demonstrated technical prowess but lacked experience in scaling a consumer-focused business.

• Product Analysis: A detailed review of the app's features, user interface, and technology stack revealed a well-designed product with innovative features. However, there were notable gaps in user engagement and retention strategies.

• Market Position: We analyzed the competitive landscape, identifying key competitors and market opportunities. While the market was substantial, the app faced stiff competition from well-established players.

• Operational Efficiency: An audit of their operational processes highlighted strengths in product development but weaknesses in marketing, customer support, and supply chain management.

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2. Risk Evaluation:

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• Financial Health: We reviewed financial statements, projections, and burn rates. The start-up showed aggressive growth projections but lacked a solid financial plan to achieve sustainability. Their burn rate was concerning, with limited runway before requiring additional funding.

• Legal and Compliance: Our legal team assessed potential regulatory and compliance issues. We discovered that the start-up had not fully addressed several regulatory requirements, posing significant legal risks.

• Technology Risks: The app's technology stack was advanced, but the reliance on third-party APIs without proper contingency plans presented potential risks.

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3. Investment Potential Analysis:

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• Strengths: The start-up had a strong product concept, a technically skilled team, and a sizable market opportunity.

• Weaknesses: Key weaknesses included inexperienced management, high burn rate, inadequate user retention strategies, and unresolved regulatory issues.

• Upside: If these weaknesses were addressed, the app had the potential to capture a significant market share and deliver high returns.

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The Levreg Solution

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Based on our comprehensive due diligence, we provided the VC firm with a detailed report outlining our findings and recommendations:

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1. Operational Strengths and Weaknesses:

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• Our analysis highlighted the start-up's strong product development capabilities but also underscored critical gaps in management experience and operational efficiency.

• We recommended that the start-up needed substantial improvements in marketing and user engagement strategies to compete effectively.

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2. Investment Risks and Potential Issues:

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• We identified significant financial risks due to the high burn rate and lack of a sustainable financial plan.

• Regulatory and compliance issues posed serious risks that could lead to legal complications and operational disruptions.

• Technology dependencies without proper risk mitigation strategies added to the overall risk profile.

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3. Investment Decision:

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• Based on our findings, we advised the VC firm against investing. The potential returns did not justify the high risks, particularly given the management team's inexperience and the unresolved regulatory issues.

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Outcomes

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• Avoided Investment Loss: Our due diligence saved the VC firm from a potential loss of $5 million, the amount they were considering for investment.

• Informed Decision Making: The VC firm reported a 40% increase in confidence in their investment decisions due to the thoroughness and accuracy of our due diligence process.

• Enhanced Risk Awareness: The VC firm improved its risk assessment protocols, incorporating many of the methods and criteria we used in this engagement.

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Levreg Partners' comprehensive due diligence provided invaluable insights that guided the VC firm to make an informed decision not to invest in the consumer goods app. Our detailed assessment of operational strengths, weaknesses, investment risks, and potential management team issues highlighted critical areas of concern that ultimately influenced the investment decision.

 

This case underscores the importance of thorough due diligence in venture capital investments, showcasing how meticulous evaluation can save substantial capital and steer investment decisions toward more promising opportunities.

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Footnote: The start-up was dissolved shortly after our due diligence process due to management team issues, validating our assessment and saving the VC from a potential loss.