What Might a Balanced Approach—One That Honors Both Heart and Mind—to Due Diligence Look Like?

Tom Bird
Strategic Philanthropy
Monday, November 29, 2010

The final section of a recent Nonprofit Quarterly article by Cynthia Gibson and Bill Deitel—in which they called for more of a balance between the art and science of philanthropic decision-making—really resonated for me.  It made me want to continue seeking a balance between art and science in my own work…a combination of the heart and mind.  But how does that kind of “due diligence” work?  I think I’ve found an approach that works—or at least it does (and has) for me. 

By way of background, in the 1990’s, I was a Silicon Valley entrepreneur.  Over the last ten years, I’ve been investing time and money in promising, early stage parts of solutions to social problems.  Both philanthropy and impact investments have a place in my portfolio.  There is quite a bit of “assessing” involved in this work—before, during, and after the investment decisions. 

Curious about the assessment process that takes place “before,” often I’ll ask other social investors how they approach due diligence.  Many seem to be struggling to find their way.  Sometimes they ask me about my process, and here is how I would answer today:  There are three, sequential, core steps for me, with a stop or go checkpoint after each. 

The first step focuses on the people part of the process.  Specifically, it involves a conversation with the person identified as the overall leader, you know, the executive director, CEO, president…the one most likely to stare at the ceiling around 3a.m.  My hunch is that things are going to change significantly over time, and this leader will need to adjust.  The conversation itself is a “looking back” sort of one that puts probing and listening skills to work.  I’m really interested in hearing the story of how and why the leader went about choosing to do this particular work, and what big personal and professional decisions have been made over time.  Good decisions and bad ones.

Long ago, I read an article by John Gardner that included the following:  “Someone defined horse sense as the good judgment horses have that prevents them from betting on people.  But we have to bet on people, and I place my bets more often on high motivation than on any other quality except judgment.”

I’m with Gardner, and look for “relentlessness” and “adjustment capability” as indicators of motivation and good judgment.  The point isn’t that these things are universally critical, but rather, that for me, they’re requirements.  I’ve isolated two things that I need and start with a method for determining whether or not I feel comfortable moving ahead with more time consuming and deeper due diligence.  They’re also not things that are easily measured.

So at the end of this first step conversation I review my notes, think for a while in a nice quiet place, and fill out a 2x2 matrix.  The criteria are “motive” and “judgment.”  And the assessments are “high” or “not high enough.”  To move on to the next step, I need to have a check mark in the “high, high” box.  There is a little science and a lot of art in this first step, and on average it takes about a half day.

The second step involves making use of a framework developed long ago by William Sahlman.  The idea is to take a position on “fit,” after conversations that include folks both inside and outside of the organization.  (See “scuttlebutt” and the “grapevine.”)  If certain things fit together, then the probability for success is enhanced.  The original fit list includes “people, opportunity, context, and deal.”  Randy Komisar adds a fifth item, “resources.”  The task is to assess the people, given the other 4 variables.  Then the opportunity, given the other 4 etc. 

The framework encourages me to put these variables up against each other in an attempt to isolate and understand the key drivers. 

If I still like the potential investment after allocating at least a full day to the “fit framework,” then a third step is undertaken:  model examination.  This part is very “forward looking” and involves drilling down on the “opportunity” variable, thinking about the actual “execution,” and doing some math.  I am hoping to answer questions related to how the leaders plan to operate—the operating model.  And then, depending on the type of organization under consideration, a mix of examining the revenue model, margin model, working capital model, and investment model follows.  Or in a straight philanthropic situation, I’ll work on the funding model as a core supplement to the operating model.  I typically do my own simple spreadsheet to supplement whatever is provided, and spend a couple of days at this stage.  (The book Getting to Plan B can be useful here.)          

Does my current approach represent “enough” rigor?  Enough feel?  Not too burdensome for the organizations under consideration?  After 10 years I’m still working out the balance.


Tom Bird is a Senior Fellow at TPI