A guide to due diligence investors

There’s no undoing or divorce with investors. You’re in for the long haul, so make sure you due diligence investors before you go all in. Here’s how.

We’ve all heard the horror stories of mismatched VCs and startup founders/CEOs – the politics, bad blood, failed relationships, or broken trust that kills good businesses. Is it really that VCs are bad people? Or is it just that not some people shouldn’t work together?

VCs will assess who you are as a person, how you operate and interact, and how able you are to attract stellar staff, partners, other investors etc. Early on, their only focus is on the quality of the founding team.

Unfortunately, founders often ignore the basics: you are about to commit to these investors for 7 to 10 years, sometimes longer, and you cannot divorce them, no matter how bad the match may be. Running thorough due diligence on investors is a must. As the CEO, it’s your responsibility to assess and find suitable investors, and yours only.

When starting to negotiate with VCs, it is far too common for founders to rely extensively on their gut feeling and “basic instinct” and decide not to due diligence investors. Yes, your runway is running short, and the cash/offer is attractive, but if there’s no match? No deal. Period. There’s nothing worse than discovering post-round that one of your investors is a bully, monster, liar, egomaniac, etc. Sadly, there are quite a few – it’s your job to find the outstanding ones. 

Everyone has different needs. When I was raising, for simplicity’s sake, mine were: the investor should be (1) a team player, (2) a good listener, and (3) true to their word. They should also be willing to lean in and help out when needed.

You must run thorough due diligence on investors and ensure they are a good fit for you and your company. Of course, gut feeling helps, but it is nowhere near enough.

Here are a few practical, no-BS tips on how to do it thoroughly and efficiently. Let’s dive in.

Check with other founders/CEOs 

You’re lucky: Tech/Digital is the most progressive industry, and CEOs share all sorts of information, tips and recommendations, so make use of it. Other industries are very jealous of ours for that.

If you’re looking for information on a potential investor, chances are good that someone in the tech community has already worked with them. Ask around – you’ll likely find more information from your peers than anywhere else.

Initially, some CEOs may be shy. You can get them to talk by asking about specific events, not about them or their character. Practical questions work very well.

“Does s/he always read the board pack well ahead of the board meeting?”
“Do they add a topic on the agenda or go with yours?”
“Do they often cut you/other board members off?”

You may ask a VC for references too, but I find that you only get to speak with their favourites and best cases, so that’s useless. I usually call CEOs directly – if a VC has an issue with it, why? What do they have to hide? It might be a red flag. 

If possible, arrange to meet personally rather than over the phone, as this allows you better to interpret their views through their facial and body expressions – and they might feel more comfortable sharing what they really think. Take note of how they describe the VC, too. Do they “always knows best”? Do they invent knowledge or hard data to hide their lack of understanding?

After 3 to 5 interviews, you will start seeing a good or bad pattern. That would be around five 20-minute chats or coffees, that’s it. Well worth the investment.

If you don’t have a community of founders to ask about investors, join ours. It’s made of 180+ founders, covering 24 countries and with hundreds of VC experiences from seed to IPO. 

Check Glassdoor and the others

If you’re a terrible person, you’re probably also a terrible boss inside the VC fund. That’s what the staff thinks, anyway, according to Glassdoor.com. There are platforms where founders can anonymously share their experiences dealing with investors, such as Landscape VC and VC Guide. Yup, anonymity is a b*tch for monsters. 😉

Of course, you should always be wary of overly negative posts – the people with the worst experiences always shout the loudest. But it’s usually worth digging into it, you’ll find some golden nuggets most of the time.

Check their depth

I love a fantastic tool out there called Shipshape.vc. You can use this venture capital search engine to find posts from specific people and what topics and tags they use frequently. Try it for yourself, and you soon discover the investor’s real interests vs. what they claim to seek/know/invest in and how much they know about a topic or your sector.

Check their personality

Investors are very polished, broad-smiled, professional, and even charming when you meet them in their office. That’s because it’s a fixed-frame environment. Well rehearsed and coordinated, with each plant and wall picture placed perfectly. They’ll deliver their lines, act and sound the part. And most of the time, it’ll be fake. An actor, not a true person.

A simple trick I’ve been using extensively is to take them out of their stage. A walk, arduous hike, lunch, dinner, or simply drinks are all excellent options. 

Watch how they interact in the real world; you’ll see their true character and personality in minutes. Do they walk in front of you all the time? Are they focused on you or their phone? Do they take calls or write a text mid-conversation? Do they open the door for you when you arrive? Do they treat service staff politely?

My favourite one is spilling your glass of water on the table “by accident” and watching how they react. Are they immediately upset and lack self-control? Do they help out with cleaning up? Can they focus and resume the conversation quickly, or did they lose all attention? You will notice changes in their attitude, focus, character, and engagement in real-life situations. 

Why do this? 

Because you see the real person under stress – and you will have loads of stress, that’s the 100% guarantee I can give you, during the 7 to 10 years you’ll build a business together. So better still know they re/act when the going gets tough. This is a much better indicator of their true personality than their office act. 

Check their collaboration skills

Once convinced that your company has potential, good investors will gladly spend a few hours with you and your team to work on a specific, strategic issue. What does success look like in 5 years? What’s the cost of us reaching this amount in revenue within three years? What does the team look like to reach its full potential in four years? And so on. 

A good investor can help you flesh out your vision and develop realistic goals and targets. They will also be able to give you advice on what to do (and what not to do) to help your company reach its full potential.

Good investors help and poor investors state. Easy to find out whose which, just use a whiteboard session.

Ask the investor directly

The list is infinite, but some of my favourite ideas include asking them a few questions that can say a lot about their behaviour. Pay attention if they take the blame for mistakes, if they share the burden with other founders or if, in their minds, they’re always fault-less. Some topic ideas:

1. The worst CEO they invested in – see if they get personal or stay factual

2. Worst challenge they experienced with a founder

3. What process they used to fire/replace a founder

4. Biggest disappointment with a CEO post investment

Take notes, stories and anecdotes will cross over with other CEOs’ own, so you can check what’s true from BS.

Final test: Psychometric test

At that point, you should have formed an image of this investor in your mind. If everything checks out, ask them to do a psychometric test. Most investors already have one, so no extra time or work is required. If it is their first time, it takes less than 45 minutes.

Make it a two-way process; many VC funds also ask founders to do theirs as well. Tell them it’s not a test, and there are no right or wrong answers – you’re simply assessing your future. 

“I see this as a marriage, and we all know that nobody’s perfect. Expectations will be realistic if we know our strengths and weaknesses in advance. I’m trying to build the strongest team possible.” 

The tests won’t tell you everything you need to know about an investor, but they can be useful. 45 minutes may seem like a lot, but it’s a small time investment for such a long commitment.

Due diligence investors might sound like a lot of work, but for the sake of your company and team, there’s nothing more important than this in the long run. You will never jump through this process when you realise how detrimental a bad relationship can be for your business.

The right VCs will understand and support the importance you put on this. Take your time, do your own research and ensure you are compatible with your potential investor. In case you’re not sure they are legit, we wrote about spotting a rogue investor and term sheet clauses that can destroy your business – check them out.

Here’s to finding the perfect match!

Francois Mazoudier
helping tech founders reach their (usually mad) dreams with the Fundraising Bootcamp (check it out).

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