Eugene Hill and the 5 Ms:

Executing the Due Diligence Plan

Lisa Cooke
Imagine receiving a thousand venture capital
(VC) proposals a yearall of them promising the
moonand having to discover the single shining
star. In any given year, we probably see
between ten to twenty plans a week. So thats a
thousand plans a year. We do serious work, read
the plan, and schedule a management meeting
on maybe fifty, says Eugene Hill. He is a
managing partner at SV Life Sciences in Boston,
whose team includes 31 professional portfolio
advisors1 managing 1.6 billion in capital.2

Hill compares the constant

onslaught of financing proposals
of recent years to trying to drink
from a fire hose. Since the early 1980s,
Hill has examined tens of thousands of
entrepreneurial proposals in the healthcare
venture capital world, but the number of
investments he has made from those mountains
of applications is in the low double-digits.
His due diligence process for investigating
these pitches may seem conservative to the
point of being merciless, but it also has made his
return on investment enviably consistent and
notably successful. There have been years when
Ive seen 1,500 business plans, issued a dozen

Theres
a huge no factor, for a whole
host of reasons, Hill says.
term sheets and invested in one deal.

Hill has been a speaker at a number of

Kauffman Fellows modules, and he spoke with
me several times over the summer.3 In this
article, I present what he shared about his 5
Ms of the due diligence process and the keys to
being one of the lucky few to get his funding goahead.

Origins of a Life Science Investor

It was pure serendipity that led Eugene Hill to
his profession as a healthcare venture capitalist.
Hired as an administrator for the Chief of Surgery
at Denver General Hospital in 1975 , Hill
discovered his passion for healthcare
methodologies and developing technologies. Im
not a trained scientist, says Hill. Healthcare
services are pure business execution. To pursue
his interest, he went to business school at night
to earn his MBA. (Figure 1 includes some offtopic points of interest.)
Much has changed since Hill, now 61, entered
healthcare venture capital. There were fewer
funds, says Hill, and the funds themselves were
much smaller. VCs were very engaged, active
investors, and there were few industry-specific
funds, says Hill, himself a life sciences investor.
Fund sizes today are larger and there is
increased specialization.

1 SV Life Sciences, SVLS Team,

http://www.svlsa.com/pages/team.php, para. 1.

2 SV Life Sciences, Welcome to SV Life Sciences,

http://www.svlsa.com/index.html, para. 2.

3 All Eugene Hill quotes are from my three telephone interviews in

July and August 2013, from our follow-up emails in September 2013,
or from Hills PowerPoint presentation on the 5 Ms.

Eugene Hill and the 5 Ms

Last book read for pleasure: The Battle of
Bretton Woods, by Benn Steil
Last music downloaded: Mark Knopfler
Last concert attended: Bach Festival,
Carmel, CA
Where were you raised: Denver, Colorado
Family: Married, three children, two younger
sisters
Hobbies: Golf, tennis, skiing, collecting
antique oriental rugs
Last vacation destination: Aspen, Colorado
Professional philosophy: Do not go where
the path may lead, go instead where there is
no path, and leave a trail - Ralph Waldo
Emerson4
Personal quote: Invest in haste. You can
repent in your leisure.
Alternate career: None. Im a serial
healthcare services entrepreneur.
Figure 1. Off Topic with Eugene Hill. Image by
Kauffman Fellows Press.

The 5Ms: Separating Wheat from Chaff

Hills painstaking proposal-refinement process
delves deeper than the potential return on
investment, and is dependent upon whether the
opportunity is an initial investment, continuing
investment, or acquisition. The crux of his

the Five
Ms: Market, Management, Method,
Money, and Metrics.
philosophy involves what he calls

As to which M is the most important, Hill

admits there is a lot of debate in Silicon Valley
and among investors about whether management
or market is the chief ingredient in any venture.
I believe market characteristics are the primary
goal that you need to use as a screen. You can
have high-quality people and a really high-quality
strategy, but if the market characteristics dont
exhibit the right order of magnitude, or the right
order dynamic to permit the right amount of
profitability or monetization of the assets, its
4 This quote is widely attributed to Emerson (e.g., BrainyQuotes.com,
ThinkExist.com), but more reputable sites such as RWE.org and
EmersonCentral.com do not include it.

probably not going to make for a successful

venture return.

Hill has developed a

structured list of questions asked
of every entrepreneur who comes
through his door. The answers can
mean the difference between
Hills likely no and the all-toorare yes. Sometimes, even a correct
Over the years,

answer, when preceded with waffling or

uncertainty, is sufficient to crater the proposal.
Hills questions are the starting point in his
dissectionwhat he calls the Hierarchy of
Triageof a candidate for venture capital
injection.

M1: The Market

Hills examination of the market involves
quantifying the business case relative to a
number of factors. He investigates the market
size, growth rate, degree of competitive
penetration, concentration of participants,
pricing and profitability dynamics, and barriers
to entry.
Hill prefers to invest in disruptive tsunami
opportunities. Because todays markets are
winner take all, he says, with the top three
entrants having the dominant share in an
established market, a new entrant must be able
to dislodge the existing competition.
Technology Feasibility
As a specialist in life sciences investment, Hill
first looks into the technology behind the
company. The first question may seem almost

Can the company

actually make the item? In other
absurd in its simplicity:

words, Hill asks whether the company will use

off-the-shelf parts, or bleeding-edge technology
and the knowledge of a few intellectual heroes.
Even if the company can produce its intended
product or service, regulation can present
obstacles. Government interference can range
from mundane, bureaucratic blocking and
tackling, to halting the business altogether.
For example, a managed-care startup might
need an insurance license, which is a
straightforward mechanical exercise: applying

forthcoming, Kauffman Fellows Report volume 5

with state regulators and confirming that the
company has sufficient capital and experienced
personnel. Compare that path to a company
developing an Alzheimers medicationpotential
treatment for a disease that is largely still a
mystery to science, with physicians having only a
modest understanding of how the disease
progresses. Not only is it going to take years of
trials to know if the drug works, but those tests
are also going to be the basis for FDA approval.
The second companys path is both costly and
challenging.
Market Feasibility
The company also must prove it understands the
viability of entering the market. Its important
to get an idea around pricing and gross margin,
and how much R&D and marketing expense it will
take to get to the market, Hill says.
Part of Hills work at this stage is to

quantify how many customers

there arethe key distinction between the
addressable market and the accessible market.

The addressable market is how

many people could potentially
buy the product, as opposed to
the accessible market, which is
the number of people who
realistically will buy the product.
A new entrant into the mobile phone scene,
for example, has 200 million potential buyers in
the United States (addressable market).
However, the products accessible market
concerns how many people have already bought
phones and how often they replace thema
number that gets quickly reduced when factoring
brand loyalty and whatever penetration rates a
new entrant might have. Finally, while 200
million U.S. residents can buy a cell phone and
the average replacement cycle is three years, a
few vendors such as Apple, and Samsung control
a large percent of the market share and spend
hundreds of millions of dollars a year in
advertising each.
Unless a company has a product that is highly
differentiated, it is unlikely to achieve any kind
of market position. Even in a virgin market, a
company must be concerned about price,
performance, and features; but in this case, at

least, one can anticipate and manage adoption

rate.
Financial Risk
The concept of financial risk is associated with
the amount of money required to run the
enterprise. Usually, $10 million to $20 million is
a very important VC milestone, whether for FDA
approval and achieving a revenue rate, or for
opening a swath of stores that will sell a product
or service in volume. But what if it will take $300
million to reach this milestone? In that
circumstance, the only real exit for the VC is if
the company has a legitimate shot at an IPO or a
buyout. If the company is going to cost $2 billion,
then there are maybe a half-dozen firms in the
world that can finance that kind of reach.
As a result, it is imperative to set boundaries
on the amount and type of financing that can be
brought in over a given timeline. Raising $2
million can be done in 90 days; that is easier
than raising $20 million, which is exponentially
easier than $200 million.
Im asking myself whether this is going to happen
with debt or equity, whether the government will
assist or provide subsidies. You have to look at all
those things, and you have to look at what the
return on investment is.

Determining whether the product or service is

financeable on reasonable terms is vital.

It is not always wise to be first

to invest, especially with
companies that require huge upfront expenditures for
infrastructure. For instance, the first three
rounds of VC investors in FedEx lost moneyonly
investors in the fourth round came out ahead.
Something is always going to go wrong, Hill
says. You always provide a cushion, because
something will always cost more and take
longer.
Hill calls this oasis preparation. It may
result in the operation being slightly overfunded,
but thats a better scenario than the VC
equivalent of crossing the Sahara and running out
of food, water, and gasoline.

M2: The Management

Nearly as important as market opportunity is
determining whether the people in charge have
3

Eugene Hill and the 5 Ms

the requisite experience and expertise to
execute.
Depending on the stage, circumstance, and the
size of the business, you require different skill sets
and different personal characteristics. Businesses
at different stages of development need different
things.

Management pedigree is key.

Missionary and Mercenary
For example, a startup needs an almost
missionary focus: a leader who gets up in the
morning with a visionary mindset and who sees
the big market opportunity and is not deterred
by noise or negativism. However, a missionary
cannot be driven solely by a psychic reward; a
mercenary attitude is also required. A missionary
executive will not necessarily succeed with a
business in its late stage of development, or in a
firm that is in need of a turnaround and facing
declining margins, mature products, or intense
competition.
In the course of his career, Hill has seen this
situation many times: People who are skilled at
running one stage of company development may
not be appropriate leaders in another stage.
The key, says Hill, is to find people whose
skill sets match the business opportunity, in
terms of content knowledge as well as the
experiential characteristics, and to anticipate
those transitions, Hill says.
CEOs get replaced approximately half the
time. To use a sports analogy, a startup usually
doesnt have a strong bench. They usually are

Replacing the CEO and

other top executives may seem
like a cruel blow to the team who
successfully chartered the
company to a critical
development point, but it is often
necessary for the company to
grow to maturation.
not deep.

These investments can take a long time. As you

transition a business from a startup to a growth
phase, you address the different challenges
businesses face. Its important to anticipate those
challenges and prepare everybody for those
transitions. Its rare that you see a CEO take a

business from startup all the way through

maturation.

Succession planning is obviously lower on the

priority list than getting the product to market,

ultimately, businesses that

succeed do so because of the
people involved.
but

We see a lot of businesses that meet market

characteristics that are attractive. Then you look
at the team, and your immediate conclusion is that
this is a team that isnt going to succeed. They
dont have the relevant experience, expertise, or
personality characteristics that enable them to
exploit the opportunity.

Fine-Toothed Comb
Hill always conducts background checks for
things like criminal activities or other icky
stuff; sometimes, however, the check turns out
to be unnecessary. Merely suggesting a
background check can open the confessional
floodgates. When we ask, Is there anything
else we need to know? the amount of stuff we
get is amazing, and horrifying, Hill says. The
most frequent falsification involves education
credentials. More seriously, in regulated
industries people have not disclosed past
criminal activities in their applications while
building the business, but in falsifying an
application to a regulator, that person has
already committed a crime.
Hill also has lawyers look over the paperwork
the company has amassed to date, looking for
fatal flaws. Many cash-poor startups have to
scrimp on legal advice, and things do not get
buttoned upthe IP may not be under control,
the companys books may not be audited, or
stock may have been sold and not accounted for
in ownership documents. Decimal points may be
misplaced in contracts; verbal agreements are
not notated.
Ive seen major gaps between what companies
thought their financials were and what we saw
when we came in with pros. None of this is a
problem until its a problem, [and] then its a huge
problem.

Face-to-Face Facts
Even management all-stars can have skeletons in
the closet. Hill likes to meet executives in both

forthcoming, Kauffman Fellows Report volume 5

business and social settings, to see how they
interact in unscripted situations. He often brings
his wife to a group dinner, because she finds out
things that he would never learn in a business
environment.
With companies that survive Hills rigorous
screening, he conducts a site visit to meet with
the management team and other principals, and
to check out the work environment. Hill always
takes a partner to avoid the inherent biases of
solo judgement.
At this stage of due diligence, credentials
mean less than the companys message and how
it is presented. For a tech company with a
scientist presenting the product or data who is a
neophyte to presentations, Hill cuts some slack.
If the sales and marketing guys stumble, thats a
red flag.

Glib, overconfident answers

also are a bad tactic for
management, especially when Hill
asks a hypothetical, speed of
light question that he knows is
baloney.
If they answer, Oh, yeah, then I know they are
bluffing. If they say, No, of course not, then I
know they are listening and have engaged their
brain before they engaged their mouth.

Hill also tries to gauge the pitch based on how

many previous VC presentations the company has
given. First-time efforts get some forgiveness,
but veterans need to nail it.
I want them to be efficient and preemptively
answer the majority of my questions. Im still
going to validate the answers they give me, but I
want them to at least put a stake in the ground.
And its absolutely okay for them to say, I dont
know the answer and Ill get back to you.

Once the pitch is complete, Hill takes a

thorough walk-around of the facility. He requests
that his tour be given by junior managers, not
executives, and during off hours if possible.
I

want to mingle with the worker

bees. I want a tour on the
graveyard shift, because theyre
always weird, and no one has told
them what they cant tell you, Hill

says. You learn a ton of stuff

when the executives arent
around.
This is his favorite part of the process,
because this sort of tour allows him to engage in
human capital valuation using the dissertation
theories of management guru Geoffrey Smart.5
Hill admits that initially he was a by-the-numbers
investor: I thought social science stuff was
malarkey. He is a convert because of Smarts
work.
Getting to know a companys culture speaks
volumes. A tech company does not have to have
a coat-and-tie dress code but it does need good
gear: A clean lab with high-quality, modern,
well-maintained equipment, even if the building
itself is old. If the office is a train wreck, with
bad discipline and garbage everywhere, how can
you trust their data when they cant even throw
their trash away? Hill says. Or it may go the
other way, with an early-stage startup choosing
palatial digs in the upscale part of town. Limited
resources should be spent on real technology,
not real estateits a matter of priorities.

M3: Method
If an entrepreneurial company can make it past
Hills first two rounds of questions, it is off to a
good start. However, the business methodology
can be a tricky path to navigate.
Drilling Down on the Value Proposition
Hill examines the companys value proposition.
In other words, what is the business model? Is it
a product, is it a service, or is it a mix of both?
Does the product save time, money, or both? Will
it succeed by increasing revenues or by slashing
costs? Will it beat competitors through higher
quality, by being quicker to market, or by being
a product revolution?
You need to know if its better-fastercheaper or a Brave New World6 equation.
5 See, e.g., Geoffrey H. Smart, The Art and Science of Human Capital
Valuation: Smart Assessment, Smarter Performance, Big Speak
Consulting white paper, 1998, http://www.bigspeak.com/consulting/
white-papers/Geoff-Smart_Horizontal-Human-Capita-Valuation.pdf;
Geoffrey H. Smart, Management Assessment Methods in Venture
Capital: Toward a Theory of Human Capital Valuation, dissertation,
Claremont Graduate University, 1998, http://www.ghsmart.com/
media/press/methods_in_venture_capital.pdf.
6 Hill uses this term frequently to refer to a certain type of
groundbreaking business entity. The phrase originates with the 1932
speculative fiction classic Brave New World by Aldous Huxley (New
York: Harper Perennial Modern Classics, 2006).

Eugene Hill and the 5 Ms

Better-faster-cheaper is good.
You have a reference point that
you can verify because you know
a ton about the market. Brave
New World is tough because the
market doesnt exist yet, Hill says.
With Brave New World, even
with the best engineering teams,
companies often are at the limits
of material science. For example, as a
startup Intel had huge waste rates before they
figured out how to do integrated circuits
properly, Hill says. They had to invent clean
rooms and large-scale integration. It meant
building something for scale, and meeting
certain specifications; it also meant investing a
lot of money, well beyond the resources of most
venture capitalists.
Compare Intel with Cypress Semiconductor, a
company that came in later but was building
highly specialized chips sold mainly into the
defense sector. Cypress was able to carve out a
very nice niche building high-performance chips
that did not need to be produced in high
quantity, because they could sell them at a
premium for their superior performance. Their
plan did not require a Brave New World solution.

the problem with

better-faster-cheaper is a low
barrier to entry. If your firm was able to
Hill believes

find a price-slashing way to get ahead of the

competition, someone else can do it to you,
says Hill. Margin erosion ensues along with a race
to the bottom in a chase for customers and
investors, an unhealthy pursuit. Thats the
greater fool theory in action: unloading the
hot potato before everyone else realizes the idea
is a loser.
Special Sauce
All of these methodologies add up to a firm
identifying its special saucebe it a less
expensive way to address a problem, a better
distribution angle, a niche created through more
attractive product characteristics, or a patent
that will provide a high barrier to entry against
competitors. However, Hill finds that while many

believe in their value, few companies actually

have the secret sauce.
If somebody suggests that their economics are
fundamentally different from everybody elses,
then either they really have identified some
special sauceand that does happen, because
theyve cracked the codeor else theyre clueless.

the percentage of those with the

secret sauce is infinitesimally small.
Its a teeny minority.
And

Almost by definition of being a startup, there

are many places where things can go wrong. Hill
believes the most frequent problem is a lack of
focus, with companies trying to overreach and do
too many things.
In his book, Crossing the Chasm,7 Geoffrey
Moore talks about the difficulty of a company
progressing from the audience of early adopters
to the early majority consumers. It takes a very
different set of skills to cross that chasm and get
a product or service into the adoption cycle
where there is extremely high growth; it also
requires a lot of discipline to get there.
Many entrepreneurs get seduced by the idea that
there is a huge opportunity they can crack
overnight, and they lose focus and discipline. They
dilute their landing force across 98 beaches, rather
than putting all their weight behind establishing
one beachhead.

Hill cites VC veteran John Doerr, who says

companies frequently overestimate the
opportunity in the near term, and underestimate
the opportunity in the long term. Its more
important to establish a series of realistic
milestones in terms of time and resource,
providing a sufficient cushion, and achieving
them, says Hill. If you pick them correctly, you
can increase value along the way.

Personally, Hill says he is more

intrigued by the companies that
do not purport to have the special
sauce.
They may not have a patent-protected product;
they just have a great management team. It is
pure execution. Anybody else who can assemble
the right team could copy what some of these
7 Geoffrey A. Moore, Crossing the Chasm: Marketing and Selling
Disruptive Products to Mainstream Customers, New York:
HarperCollins, 2002.

forthcoming, Kauffman Fellows Report volume 5

businesses do, but they will succeed simply
because they execute better.

M4: The Money

Next, Hill turns his attention to how the business
is going to operate on a daily basis. He looks
closely at the cash-flow statement, because it
tells him how the business is actually operating
even though most income statements are
completely illusory.
It boils down to a simple equation: How much
money is it going to take, and how long is it
going to take? Capital is more than cash,
obviously. An early question is whether the
entrepreneur anticipates using equity, debt
financing, government loans or grants, customer
down payments, or a combination of sources.
The last thing an entrepreneur wants to do is
dilute his share, so equity financing is often a
last resort.
Talking about money may be one of the most
time-consuming aspects of due diligence,
because this is why entrepreneurs are talking to
venture capital in the first place. The financiers
also want to make sure their money is spent
well, not wasted on lavish game rooms and
Christmas parties.

Hill makes a point of searching

for entrepreneurs who have lesscapital-intensive business plans.
Needing a lot of start-up capital is a red flag. He
asks, Is the money going to pay for people,
office space, or industrial equipment? What is
the best way to finance that?
In looking at employees, one factor is
whether there are only five people in the world
who can do a critical job, or fifty thousand who
can do it.
You would be surprised at how many businesses
financials just dont make any sense. Theyve
grossly underestimated the real amount of money
they are going to need to hire to get the best and
brightest, if thats what they need.

If the company is based in a remote location,

getting the best and brightest could be a
challenge; if the company is in San Francisco or
La Jolla, however, it had better be ready to open
its purse strings to attract and keep talent.
Then theres the almost-clichd, inflated
return on investment calculation by the

entrepreneureye candy for potential

investors, but often not grounded in reality. Hill
recalls meeting a group of eager Harvard
sophomores looking for funding whose healthcare
idea was intriguing, but unfocused. They were
trying to do five things, when any one of the five
would have been challenging enough by itself,
but they had all five mixed up together, Hill
says. Their equation detailed two years, $30
million in revenue, and $7 million in profit.
Ive been doing this for 35 years, and that would
have been unprecedented. Ive never seen it
happen. So they discredited themselves by putting
forth a proposition that on its surface was so
incredible no one would believe it. Thats an

example we see every day, where

something put forth is so impossibly
incredible, where if they are crazy
enough to think thats realistic, you
have to start asking whether every
other assumption is wrong.
Relating back to the Market equation, Hill
delves into what is causing the opportunity, and
what is driving it. Is it sustainable, an aberration,
or a time-limited condition?
Hill also warns against point valuation by
VC investors, who often use todays numbers to
gauge their expected return down the line.
Look at long-term trends, over five to seven
years. Markets are cyclical. There are times
when things are depressed, and times when they

Assuming your exit

valuation is based on todays
inflated market, you are going to
be in for a surprise, Hill says.
are inflated.

The answers to these questions inform the

VCs hoped-for return on investment over time.
From that point, Hill can project what he might
realistically try to extract from the venture,
should it be successful.

M5: The Metrics

The notion of metrics is to quantify as much of
the business opportunity as you can, Hill says. A
key question is how many potential customers
the company is chasing. If there are 10
customers, you can go visit them yourself; if
there are a million customers, youre not going
to see them personally.
7

Eugene Hill and the 5 Ms

Next, Hill investigates the sales cycles. Who
are the customers and how do they buy these
things? Do they buy them at Wal-Mart, over the
Internet, or only on a request-for-proposal basis?
How many do they buy? Is it a $10, $100, or a $2
million product? Is the company selling at a price
dictated by the market, or can it set the price? Is
production scalable or sensitive to rapid volume
changes? The sales cycle dictates how much you
can afford to spend on promotion, which then
dictates your operating margin and things like
that, Hill says.
How a company forecasts its sales is a key
metric. Hill refers to the pipeline fallacy,
where a company might be overconfident in its
success rate in penetrating a market. Are its
forecasts based on actual customers, cash-inhand qualified prospects, prospects who have
been pitched but have not responded, or just
pie-in-the-sky suspects? Im trying to figure out
how credible all these numbers are, Hill says.
People

will use terminology like

pipeline, and you have to peel
the onion back to really see what
they are talking about."
Another stumbling block is if there is a solesource supplier somewhere in the mix. If there
is, now Im nervous. What happens if that
supplier goes out of business? What happens if
they raise the price? Im trying to see whether
the assumptions made are realistic, Hill says.
Knowing precisely where the product is in
development is a crucial element for a venture
investor. With a tech company, a product may be
in the alpha stage, just a big idea in someones
head and still in early development. It could be
in beta testing, where the product is functioning
and being debugged in a controlled environment.
Or, people may have actually paid for the
product and are giving feedback.
Then, of course, there is the product itself,

the numerous ways even a

savvy venture investor can slip
upHill calls it being deluded by
the demo. He admits to being blindsided
and

by nanocrystal developments at a leading

research university. This exciting medical
technology had been licensed, and a company
wanted to commercialize it for a specific

medical application. Hills group joined a few

others to fund it, but when the time came for
the actual technology transfer (moving outside
the university laboratory environment and into a
commercial environment), it took three times as
long and cost four times as much as anticipated.
The nanocrystals simply were not ready for prime
time.
Hill takes his share of the blame in this case,
speaking with a touch of chagrin.
We should have realized that these guys didnt
really have it fine tuned. A laboratory, in a supercontrolled environment, not even producing
consistently, cant produce at scale. There was a
huge amount of variability in quality control. There
were just a lot of things that hadnt been worked
out.
We didnt do enough work figuring out where
they were at, and the people that we charged with
doing the technology transfer didnt understand
how much work remained to be done. Because
they talked past each other, no one really nailed
exactly where things are were.

Hill sees this mistake happen all the time with

software company investors.
We will see a mockup. Somebody has developed a
series of screens, and the screens look pretty. You
can do some stuff with thembut theres nothing
behind them. The integration coding work is huge.

After seeing a lush, elegant

presentation, Hills first response
is, I want to see it in the field, not
where there is 24-7 support, but where I
can tell if its doing what its
supposed to do.
Hill is the first admit it: Even with all the
background checks, psychological profiling,
interviews, and market assessment, choosing the
right venture to back is still a judgment call.

A Prince among Frogs

What can an entrepreneur do to get to the head
of the line with Eugene Hill? Having an
established network of trusted connections
helps. Unsolicited proposals go the bottom of the
pile, if not the circular file.
We kiss a ton of frogs to find the prince, and there
may be more frogs than there used to be. In the
old world, pre-Web, pre-digital, where people had

forthcoming, Kauffman Fellows Report volume 5

to produce a hard-copy business plan and use the
U.S. mail, there was some sort of cost. Whereas
today, they go on the web, push a button, and
business plans fly through the ether.

Figure 2 includes some of the

questions Hill has formulated
around the Five Ms; he uses the
answers to weed out the vast
majority of applicants. Both
entrepreneurs and VCs may find them useful.
Hill acknowledges that his methods are gained
from his own personal perspective, and modestly
refrains from categorizing it as some
comprehensive genius solution to due diligence.

Instead, he concludes, This is just a series of

lessons that Ive learned, sometimes with a lot of
blood, sweat, and tears. These are the
takeaways that Ive had over thirty years. This is
a journey, not a destination.

Lisa Cooke
A professional journalist and syndicated
columnist for the early part of her career, Lisa
has been a writer and content strategist for San
Francisco and Silicon Valley corporations and
startups for the last fifteen years. Her clients
have included Twitter, Adobe, Shutterfly,
Genentech, Zynga, Time Warner Cable, and the
Department of Defense.

Eugene Hill and the 5 Ms

The Market

The Money

What is the product and how many are

people going to buy?

How does the company plan to build and sell

the product?

Is the market large and growing fast?

Are the Intellectual Property barriers low?

What is their competitive advantage, and

how long will it take for them to achieve it?

Is the company in a declining market, with

intense competition, where a potential
turnaround situation exists because of
changed circumstances?

How much money is it going to take to get to

market, and where are the funds coming
from?

Does the company need to spend extra to

lure the best and brightest minds to create
the product, or can it make do with a
cheaper rank-and-file?

Is it a visionary startup, in its growth phase,

or approaching the buyout phase?

Is it a product or service business?

How does distribution happen?

What are the pricing dynamics?

Can a fast follower easily come in and erode

margins?

The Management

The Metrics

Is the company selling to thousands of

customers or to a limited audience?

How will the customers actually buy the

product?

Do the team leaders have sufficient

experience and talent to make the venture
succeed?

How much will the product cost, and what is

the operating margin?

How much will the company spend on

promotion?

Can they handle the transition period from

startup to successful operation?

Is the company a price setter or price taker?

Do any of the top executives have skeletons

in their closet?

Is their model consistent with other

competitors?

Does the management presentation ring

true, or are they glib and full of bluster?

Is there is single-source component supplier

that could raise the price or simply
disappear?

Did lawyers ensure their documents line up,

or are filings filled with potentially costly
errors and omissions?

The Method

Will the companys value proposition succeed

through increased revenue, or cost savings,
or by working better-faster-cheaper?

Is it a Brave New World proposition?

Is the company B2B or B2C?

What is the companys special sauce?

Is the business planning to grow organically

or through acquisition?

Figure 2. Due diligence questions from Eugene Hills Five Ms. Image by Kauffman Fellows Press.