{"id":182,"date":"2022-11-10T09:21:00","date_gmt":"2022-11-10T09:21:00","guid":{"rendered":"https:\/\/blog.mazoudier.com\/?p=182"},"modified":"2023-01-03T14:12:39","modified_gmt":"2023-01-03T14:12:39","slug":"a-guide-to-due-diligence-investors","status":"publish","type":"post","link":"https:\/\/blog.mazoudier.com\/index.php\/2022\/11\/10\/a-guide-to-due-diligence-investors\/","title":{"rendered":"A guide to due diligence investors"},"content":{"rendered":"\n<p class=\"has-medium-font-size\">There&#8217;s no undoing or divorce with investors. You\u2019re in for the long haul, so make sure you due diligence investors before you go all in. Here&#8217;s how.<\/p>\n\n\n\n<p>We&#8217;ve all heard the horror stories of mismatched VCs and startup founders\/CEOs &#8211; 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\u2019t work together?<\/p>\n\n\n\n<p>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.<\/p>\n\n\n\n<p>Unfortunately, founders often ignore the basics: <strong>you are about to commit to these investors for 7 to 10 years<\/strong>, 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\u2019s your responsibility to assess and find suitable investors, and yours only.<\/p>\n\n\n\n<p>When starting to <a href=\"https:\/\/blog.mazoudier.com\/index.php\/2021\/06\/15\/not-all-investors-are-equal-this-is-why-and-how-you-must-prioritise-them\/\">negotiate with VCs<\/a>, it is far too common for founders to rely extensively on their gut feeling and \u201cbasic instinct&#8221; and decide not to due diligence investors. Yes, your runway is running short, and the cash\/offer is attractive, but <strong>if there&#8217;s no match? No deal. Period. <\/strong>There&#8217;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 \u2013 it&#8217;s your job to find the outstanding ones.&nbsp;<\/p>\n\n\n\n<p>Everyone has different needs. When I was raising, for simplicity\u2019s sake, mine were: the investor should be <strong>(1) a team player, (2) a good listener, and (3) true to their word<\/strong>. They should also be willing to lean in and help out when needed.<\/p>\n\n\n\n<h4 class=\"has-black-color has-text-color has-background wp-block-heading\" style=\"background-color:#e68200;font-style:normal;font-weight:300\"><strong><span style=\"text-decoration: underline;\">You must run thorough due diligence on investors and ensure they are a good fit for you and your company. <\/span><\/strong>Of course, gut feeling helps, but it is nowhere near enough. <\/h4>\n\n\n\n<p>Here are a few practical, no-BS tips on how to do it thoroughly and efficiently. Let&#8217;s dive in.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Check with other founders\/CEOs&nbsp;<\/h3>\n\n\n\n<p>You\u2019re 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.<\/p>\n\n\n\n<p>If you&#8217;re looking for information on a potential investor, chances are good that someone in the tech community has already worked with them. <strong>Ask around<\/strong> &#8211; you&#8217;ll likely find more information from your peers than anywhere else.<\/p>\n\n\n\n<p>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. <\/p>\n\n\n\n<p class=\"has-text-color has-medium-font-size\" style=\"color:#e68200\"><em>&#8220;Does s\/he always read the board pack well ahead of the board meeting?\u201d<\/em><br><em>\u201cDo they add a topic on the agenda or go with yours?\u201d<\/em><br><em>\u201cDo they often cut you\/other board members off?\u201d<\/em><\/p>\n\n\n\n<p><strong>You may ask a VC for references too<\/strong>, but I find that you only get to speak with their favourites and best cases, so that\u2019s useless. I usually call CEOs directly \u2013 if a VC has an issue with it, why? What do they have to hide? It might be a red flag.&nbsp;<\/p>\n\n\n\n<p>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 &#8211; and they might feel more comfortable sharing what they really think. Take note of how they describe the VC, too. Do they &#8220;always knows best&#8221;? Do they invent knowledge or hard data to hide their lack of understanding?<\/p>\n\n\n\n<p>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\u2019s it. Well worth the investment.<\/p>\n\n\n\n<p><strong>If you don&#8217;t have a community of founders to ask about investors,<a href=\"https:\/\/fundraising-bootcamp.com\/\"> join ours<\/a>.<\/strong> It\u2019s made of 180+ founders, covering 24 countries and with hundreds of VC experiences from seed to IPO.&nbsp;<\/p>\n\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Check Glassdoor and the others<\/h3>\n\n\n\n<p>If you&#8217;re a terrible person, you&#8217;re probably also a terrible boss inside the VC fund. That&#8217;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 <a href=\"https:\/\/www.landscape.vc\/\">Landscape VC<\/a> and <a href=\"https:\/\/www.vcguide.co\/\">VC Guide<\/a>. Yup, anonymity is a b*tch for monsters. \ud83d\ude09<\/p>\n\n\n\n<p>Of course, you should always be wary of overly negative posts \u2013 the people with the worst experiences always shout the loudest. But it&#8217;s usually worth digging into it, you\u2019ll find some golden nuggets most of the time.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Check their depth<\/h3>\n\n\n\n<p><strong>I love a fantastic tool out there called <a href=\"https:\/\/www.shipshape.vc\/signin?utm_source=referral_org&amp;utm_medium=ctr&amp;utm_campaign=credit_referral&amp;utm_id=Fundraising+Bootcamp\" target=\"_blank\" rel=\"noreferrer noopener\">Shipshape.vc.<\/a> <\/strong>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&#8217;s real interests vs. what they claim to seek\/know\/invest in and how much they know about a topic or your sector.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Check their personality<\/h3>\n\n\n\n<p>Investors are very polished, broad-smiled, professional, and even charming when you meet them in their office. <strong>That\u2019s because it\u2019s a fixed-frame environment.<\/strong> Well rehearsed and coordinated, with each plant and wall picture placed perfectly. They\u2019ll deliver their lines, act and sound the part. And most of the time, it\u2019ll be fake. An actor, not a true person.<br><br>A simple trick I\u2019ve been using extensively is to <strong>take them out of their stage<\/strong>. A walk, arduous hike, lunch, dinner, or simply drinks are all excellent options.&nbsp;<\/p>\n\n\n\n<p>Watch how they interact in the real world; you\u2019ll 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?<\/p>\n\n\n\n<p>My favourite one is spilling your glass of water on the table &#8220;by accident&#8221; 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.&nbsp;<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"700\" height=\"509\" src=\"https:\/\/blog.mazoudier.com\/wp-content\/uploads\/2023\/01\/glass_of_water_funds-700x509.png\" alt=\"\" class=\"wp-image-195\" srcset=\"https:\/\/blog.mazoudier.com\/wp-content\/uploads\/2023\/01\/glass_of_water_funds-700x509.png 700w, https:\/\/blog.mazoudier.com\/wp-content\/uploads\/2023\/01\/glass_of_water_funds-300x218.png 300w, https:\/\/blog.mazoudier.com\/wp-content\/uploads\/2023\/01\/glass_of_water_funds-768x559.png 768w, https:\/\/blog.mazoudier.com\/wp-content\/uploads\/2023\/01\/glass_of_water_funds-800x582.png 800w, https:\/\/blog.mazoudier.com\/wp-content\/uploads\/2023\/01\/glass_of_water_funds.png 1408w\" sizes=\"auto, (max-width: 700px) 100vw, 700px\" \/><\/figure>\n\n\n\n<p><\/p>\n\n\n\n<p><strong>Why do this?&nbsp;<\/strong><\/p>\n\n\n\n<p>Because you see the real person under stress \u2013 and <strong>you will have loads of stress<\/strong>, that\u2019s the 100% guarantee I can give you, during the 7 to 10 years you\u2019ll 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.&nbsp;<\/p>\n\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Check their collaboration skills<\/h3>\n\n\n\n<p>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. <em>What does success look like in 5 years? What\u2019s 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?<\/em> And so on.&nbsp;<\/p>\n\n\n\n<p><strong>A good investor can help you flesh out your vision and develop realistic goals and targets<\/strong>. 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.<\/p>\n\n\n\n<p><strong>Good investors help and poor investors state<\/strong>. Easy to find out whose which, just use a whiteboard session.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Ask the investor directly<\/h3>\n\n\n\n<p>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 <strong>take the blame for mistakes<\/strong>, if they <strong>share the burden with other founders<\/strong> or <strong>if, in their minds, they&#8217;re always fault-less<\/strong>. Some topic ideas:<\/p>\n\n\n\n<div class=\"wp-block-group\"><div class=\"wp-block-group__inner-container is-layout-constrained wp-block-group-is-layout-constrained\">\n<p>  1. The worst CEO they invested in \u2013 see if they get personal or stay factual<\/p>\n\n\n\n<p>  2. Worst challenge they experienced with a founder<\/p>\n\n\n\n<p>  3. What process they used to fire\/replace a founder<\/p>\n\n\n\n<p>  4. Biggest disappointment with a CEO post investment<\/p>\n<\/div><\/div>\n\n\n\n<p>Take notes, stories and anecdotes will cross over with other CEOs\u2019 own, so you can check what\u2019s true from BS.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<h3 class=\"wp-block-heading\">Final test: Psychometric test<\/h3>\n\n\n\n<p>At that point, you should have formed an image of this investor in your mind. If everything checks out, <strong>ask them to do a psychometric test<\/strong>. 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.<br><br>Make it a two-way process; many VC funds also ask founders to do theirs as well. Tell them it&#8217;s not a test, and there are no right or wrong answers &#8211; you&#8217;re simply assessing your future.&nbsp;<\/p>\n\n\n\n<p class=\"has-medium-font-size\"><em>&#8220;I see this as a marriage, and we all know that nobody&#8217;s perfect. Expectations will be realistic if we know our strengths and weaknesses in advance. I&#8217;m trying to build the strongest team possible.&#8221;&nbsp;<\/em><\/p>\n\n\n\n<p>The tests won&#8217;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&#8217;s a small time investment for such a long commitment.<\/p>\n\n\n\n<p>Due diligence investors might sound like a lot of work, but for the sake of your company and team, there&#8217;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.<\/p>\n\n\n\n<p><strong>The right VCs will understand and support the importance you put on this.<\/strong> Take your time, do your own research and ensure you are compatible with your potential investor. In case you&#8217;re not sure they are legit, we wrote about spotting a rogue investor and <a href=\"https:\/\/blog.mazoudier.com\/index.php\/2022\/09\/12\/minority-veto-right\/\">term sheet clauses that can destroy your business<\/a> \u2013 check them out.<\/p>\n\n\n\n<p>Here\u2019s to finding the perfect match!<\/p>\n","protected":false},"excerpt":{"rendered":"<p>There&#8217;s no undoing or divorce with investors. You\u2019re in for the long haul, so make sure you due diligence investors before you go all in. Here&#8217;s how.<\/p>\n","protected":false},"author":1,"featured_media":196,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"content-type":"","footnotes":""},"categories":[5],"tags":[23,28,20,22,18,33,31,25,17,26,21,32,29,30,27,19,34,24],"class_list":["post-182","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investor-tips","tag-alignment-with-company-values-and-goals","tag-asking-for-references","tag-business-partnerships","tag-ceo-responsibility","tag-due-diligence","tag-glassdoor","tag-gut-feeling","tag-interviewing-ceos","tag-investors","tag-long-term-relationships","tag-mismatched-investors","tag-negotiating-with-vcs","tag-online-review-sites","tag-recommendations-from-peers","tag-research-and-evaluation","tag-startup-founders","tag-transparency-with-investors","tag-vcs"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>A guide to due diligence investors &#8226; Fundraising Bootcamp Blog<\/title>\n<meta name=\"description\" content=\"There&#039;s no undoing or divorce with investors. 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