Step 1: Financial and Legal Due Diligence
In Step 1 the Theta Model addresses traditional financial and legal due diligence components that try to identify the unknown by validating the business plan, uncovering missing pieces, defining the financial and legal risk, as well as other risks associated with the market, competition, and intellectual property (IP).
Step 2: Environmental, Social, and Governance Assessment
In Step 2, the Theta Model performs due diligence on Environmental, Social, and Governance criteria. The adoption of Environmental, Social, and Governance (ESG) metrics of the United Nations (UN PRI, 2013) helps (1) reduce risk, (2) create sustainable and responsible companies from the very beginning, (3) produce more transparency (IIRC, 2013), and generate compliance with the International Stock Exchange Initiative to receive a good rating in case an initial public offering (IPO) will occur. There are several tools that can be applied to accomplish the goals in Step 2. The GIIRS-based (Global Impact Investing Rating System) self-assessment offered by B Corp (2015) is highly recommended.
Step 3: Individual Assessment
Beginning with Step 3, the Theta Model goes well beyond traditional investing, sustainable and responsible investing, or impact investing criteria. It includes additional aspects of reality—such as interior, evolutionary, behavioral, inter-objective, and inter-subjective. There are various tools that can be applied here. We have had very good results with Susanne Cook-Greuter’s SCT Sentence Completion Test but also with LDMA (Leadership/Lectical Decision Making Assessement), a tool based on work performed at Harvard University Graduate School of Education; initiated by Prof. Kurt W. Fisher and later enhanced by Stein & Dawson & Fischer.
Step 4: Team Assessment
Any experienced investor will agree that investing in a high-quality management is the litmus test not only for the success of the start-up, but more importantly for the success of the partnership between investor, entrepreneurs, community, suppliers, and other stakeholders. In our experience, more than 80 percent of the investment risk can be addressed by performing an integral due diligence on the team. Here too, there are a myriad of tools that can be applied to team assessment. The Five Dysfunctions of a Teamis such a tool based on the book with the same title by Patrick Lencioni.
Step 5: Gap Analysis and Report
Step five is the summary of the integral due diligence process contained in the Theta Model. It offers a gap analysis and report und makes the final recommendation for the investment based on the Theta Factor, which is a number that results from the summary of each due diligence step. A positive investment decision will be made only if more than 80 percent of all requirements have been fulfilled in order of importance.