Case studies.

Executive summary

This case study describes the financial due diligence carried out on a US-based satellite start-up on behalf of a European venture capital (VC) fund. The start-up had developed a promising business model with strong growth potential but needed significant funding to scale. The VC fund was keen to invest but required a thorough review of the company’s finances to assess its viability, scalability, and long-term profitability. This report outlines the due diligence steps, and challenges faced.

1. Background

The start-up, based in Silicon Valley, aimed to build and deploy a constellation of Low Earth Orbit (LEO) satellites to provide Earth imagery. It had completed a successful seed round, developed a prototype satellite, and secured early government and industry customers. However, achieving wider coverage required substantial further investment.

The European VC fund specialised in technology investments, including several in the satellite sector. It recognised the potential for growth but needed to confirm the start-up’s financial health and identify potential risks.

2. Objectives of financial due diligence

The review focused on:

  • Accounting policies: Particularly revenue recognition, ensuring compliance with US GAAP.
  • Balance sheet: Analysing key positions in detail.
  • Profit and loss: Reviewing revenue streams and major costs.
  • Financial model: Testing the accuracy, consistency, and completeness of the company’s forecasts.
  • Tax position: Conducting a high-level tax review.

3. Due diligence process

The review began with an analysis of financial statements:

  • Income statements: To track historical revenue, margins, costs, and profitability trends.
  • Balance sheets: To assess assets, liabilities, equity, and debt, including any off-balance-sheet items.
  • Cash flow statements: To evaluate liquidity, capital expenditure, and working capital needs.

As the company was still early-stage, historical data was limited. Key findings included the absence of a formal revenue recognition policy, a revenue model based on long-term government and commercial contracts, and weak accounting practices that required extensive clarification from management.

4. Key Findings

  • Revenue recognition: No formal policy in place, making accurate assessment impossible.
  • Financial model: Inadequate structure, lack of sensitivity analysis, inappropriate hardcoding, and omission of key costs rendering its reliability suspect. Recommended rebuilding the model for accuracy and flexibility.
  • Finance function: Under-resourced, reducing its capacity to produce reliable reports and forecasts. Recommended increasing staffing and capability.