Congratulations! You’ve reached a point in your startup’s journey where you’re fundraising and looking at investors to raise with. You might even already have investors interested and willing to sign a term sheet.
So now what?
As attractive as that big cheque is, now is the time to ensure you have done, or will shortly be doing, your due diligence (DD). Just as investors (presuming they’re sensible and respectable) will have conducted their DD on you and your startup, now is the time for you to conduct DD on them.
DD is not a one sided process and effective DD will see everyone involved in a relationship fully aware of the details and informed as to the nature of the relationship moving forward.
What is DD?
Broadly speaking, DD is a systematic way to analyse a decision in order to primarily mitigate risk. Sounds boring but it’s oh so important!
Not many decisions can be made with 100% certainty, but comprehensively and exhaustively collecting and analysing information before making a decision, helps ensure the decision is made in an informed way, meaning the desired outcome is more likely to be accomplished.
What is DD in the startup world?
DD in the startup world is somewhat shrouded in mystery, with information to guide founders through the process limited.
In relation to fundraising, DD is generally considered to be the process by which investors look for evidence to support a founder's claims that made the investors want to invest in the first place.
This is true, but it’s only one part of the proverbial puzzle.
A quick google search for “DD when fundraising” returns plenty of results for how founders can help investors conduct DD, but not so many for how founders can conduct DD on investors themselves.
But DD on investors is just as important. Just like an investor should want to know they are going to be rewarded for investing in a startup, a founder should want to know that the investor they’re raising with is a ‘good’ one, right for them and that their experience working together will be pleasant. In the words of one founder;
“Due diligence is critical, Henry VIII didn't invent investor divorce after all. Only raise when you don't need to so your due diligence counts. If you can't walk away it's meaningless”.
Nevertheless, when time is one of founder’s most valuable resources and they have most likely already invested (‘scuse the pun) a considerable amount helping investors conduct their DD, (and let’s not forget likely have an overpowering desire to just close their round and get back to building their company), conducting further DD might appear trivial and inconvenient and therefore be tempting to put to one side or rush through.
But when you enter into a relationship with an investor, you’re in it for the long-haul. As another founder put it;
it’s “Easier to boot a co-founder than an investor”.
Therefore, determining whether an investor is good (for you) BY DOING YOUR DD may be the difference between your startup rocketing upwards or facing an uphill battle to grow, improve and even beginning a downward spiral.
What position are you in?
It’s worth noting that your ability to conduct DD on an investor or, rather, your ability to act on your findings, may be constrained depending on the position you find yourself in.
Do you have lots of investors to pick from or are your options few and far in-between? The answers to these questions will likely determine just how much you can pick and choose. As one founder describes;
“There are two types of founders: those with options (i.e. multiple potential investors) & those without options (those who are struggling to close the round).
When it comes to those without options, due diligence is really an ethical exercise - no one wants to work with a sexist or a racist. But whether that investor is the most helpful in times of stress, or has the network they claim, are not reasonable concerns if you have no other avenues. The money itself is all that matters.
For those with multiple options, due diligence is crucial: weaponising your cap table can give you meaningful leverage. Optimise what is existential for you (e.g. certain types of difficult to get introductions, hiring advice etc etc) and then get concrete evidence (typically in the form of actual introductions => having a simple list of impressive names doesn't matter). VCs will always give you references, but surprise-surprise, they'll be founders who like (if not love) them. If you have back channels to other founders - definitely vet others in the portfolio. You want a 360 degree picture.”
So, whether you deem it worth your time conducting DD when you’re without options, and therefore know you’ll likely close with an investor regardless, is up to you. But arguably and regardlessly, it’s always better to know who you’re getting into bed with rather than walking blindly. In the former, foreseen difficulties will remain just that, difficulties, but with the latter they will be nasty surprises.
We know that traditionally, comprehensive DD has been time consuming and often difficult. But with the thousands of reviews and ratings of investors on Landscape, this process is far simpler, easier, shorter, informative and comprehensive, meaning you can spend more time and energy on the thing that really matters, building your startup!
Rather than having to spend an inordinate amount of time conducting your own research and utilising your network, Landscape provides you with access to thousands of individual experiences, all in one, easy to navigate place.
If you haven't done so already, create a Landscape account here and leave an anonymous review for an investor you're interacted with here, even if it was just a phone call or cold outreach email you didn't hear back from.