Evaluating Investment Opportunities

---
name: evaluating-investment-opportunities
description: Structures PE/VC investment evaluation with business model assessment, market analysis, and return potential. Use when evaluating deals, screening investment opportunities, or assessing company fit.
tags:
  - analysis
  - private-equity
  - investment
  - valuation
metadata:
  author: casemark
  practice_areas:
    - Private Equity
    - Venture Capital
    - Growth Equity
  document_types:
    - Evaluation Report
  skill_modes:
    - Analysis
    - Assessment
---
# Evaluating Investment Opportunities

## When To Use

- Screening a new deal from an inbound teaser, CIM, or pitch deck
- Conducting preliminary diligence before issuing an LOI or term sheet
- Comparing multiple opportunities in a pipeline review
- Preparing an investment committee memo or deal screening summary
- Reassessing a portfolio company for follow-on investment or exit readiness

## Inputs To Gather

- **Company materials**: CIM, pitch deck, financial model, or data room access
- **Financials**: At minimum 3 years of historical P&L, balance sheet, and cash flow; projections if available
- **Deal parameters**: Proposed valuation, investment size, instrument type (equity, convertible, preferred), ownership target
- **Market data**: Industry reports, comparable transactions, public comps where relevant
- **Management information**: Org chart, founder/CEO background, key person dependencies
- **Fund context**: Fund strategy, thesis fit, sector/stage mandate, portfolio overlap risk

## Workflow

1. **Frame the opportunity**
   - Confirm investment stage (seed, growth, buyout, recap) and applicable evaluation lens
   - Identify the core investment thesis — what must be true for this to be a strong return
   - Flag any immediate disqualifiers (sector exclusion, size mismatch, geographic restriction)

2. **Assess the business model**
   - Revenue model: recurring vs. transactional, unit economics, customer concentration
   - Gross margin profile and trajectory; path to operating leverage
   - Customer acquisition cost (CAC), lifetime value (LTV), and LTV/CAC ratio for SaaS/consumer
   - Capital intensity and working capital dynamics
   - Defensibility: IP, network effects, switching costs, regulatory moats

3. **Analyze the market**
   - TAM/SAM/SOM sizing with bottom-up validation where possible
   - Growth rate and secular tailwinds or headwinds
   - Competitive landscape: direct competitors, substitutes, and new entrant risk
   - Regulatory environment and pending policy changes [VERIFY — jurisdiction-specific]

4. **Evaluate financial performance and projections**
   - Revenue CAGR, gross margin trend, EBITDA margin progression
   - Cash conversion and free cash flow generation
   - Quality of earnings: one-time items, add-backs, normalization adjustments
   - Reasonableness of management projections vs. historical performance and market benchmarks
   - Working capital seasonality or volatility

5. **Model return potential**
   - Entry valuation relative to comps (EV/Revenue, EV/EBITDA, P/E as appropriate)
   - Base, upside, and downside return scenarios
   - Target IRR and MOIC under each scenario; sensitivity to exit multiple and hold period
   - Capital structure impact: leverage, dilution from future rounds, liquidation preferences
   - Exit path assumptions: strategic sale, IPO, secondary, sponsor-to-sponsor [VERIFY — exit market conditions]

6. **Assess management and governance**
   - Track record of founders/CEO in scaling businesses
   - Key person risk and depth of management bench
   - Board composition and investor governance rights
   - Alignment of incentives: vesting, co-invest, earnout structures

7. **Identify key risks and mitigants**
   - Rank risks by likelihood and severity: customer concentration, technology obsolescence, regulatory, execution
   - Map each material risk to a specific mitigant or diligence workstream
   - Flag any risks that are binary and unmitigable (deal-breakers vs. pricing adjustments)

## Output

Structure the evaluation report with these sections:

- **Executive Summary**: One-paragraph investment thesis, proposed terms, and recommendation (proceed / pass / conditional proceed)
- **Company & Market Overview**: Business description, market sizing, competitive positioning
- **Financial Analysis**: Historical performance, projection assessment, quality-of-earnings highlights
- **Return Analysis**: Entry valuation, scenario-based IRR/MOIC, sensitivity tables
- **Risk Matrix**: Top 5–8 risks with severity rating, likelihood, and mitigant for each
- **Diligence Priorities**: Ordered list of open items to resolve before final decision
- **Recommendation**: Clear proceed/pass/conditional with specific conditions or next steps

## Quality Checks

- Entry valuation benchmarked against at least 3 comparable transactions or public comps
- Revenue and EBITDA projections stress-tested under downside assumptions, not just management case
- All add-backs and normalization adjustments individually identified and justified
- Customer concentration quantified (top 1, top 5, top 10 as % of revenue)
- Exit assumptions grounded in recent market data, not aspirational multiples [VERIFY — current exit environment]
- Every [VERIFY] tag resolved or explicitly flagged as an open diligence item
- No forward-looking statements presented as facts; all projections labeled as estimates
- Fund mandate and portfolio construction fit explicitly addressed