In the past, VCs were expected to do extensive due diligence on startup companies. The investors called customers, and they called the founders.
After a long run of investors holding more than half the power, power has shifted to the founders. The pace at which deals were done increased and the time to reachconviction fell sharply. Less intrusive vetting is a result of this compressed diligence cycles.
Due diligence has been affected by the growth of venture capital and check sizes. The impact of less diligence by private-market investors will not be known for some time.
We can see that inflating valuations can lead to unnecessary pressure, making startup rush product development and hiring, and faster checks can lead to an over-reliance on existing networks. The concept of Tiger Global bringing pre-diligence to deal making is becoming the norm, with venture players rapidly changing how they make decisions.
Mary Ann Azevedo, the co-owner of Equity, along with Alex,Natasha and Mascarenhas, dive into what is in store for startup due diligence.
Informalization will continue for a long time.
In tech and all industries, back channels have existed for a long time as a way for two parties to exchange information. In venture investing, back channel can be used by an investor to check out an entrepreneurial who is about to wire them millions of dollars, and by the founder who wants to make sure the money behind their money is stable. The process helps stop predatory investors from winning deals.
Entrepreneurs need to pay attention to what investors can bring to the table and take their heads out of the clouds. Mary Ann Azevedo is a person.
The venture market doesn't appear to be slowing down, so I expect next year will bring an even greater focus on back channel in the world of first check fundraising. The growing importance of back channels is due to the fact that the only way to keep up with fast checks is to offer more channels for gut checking.
Due diligence used to be like a months-long process with back-to-back meetings. As founder friendly becomes the norm, it's more important than ever for entrepreneurs to assess the check writer, understand their options and have better navigation in this capital-rich environment.
The founder will need to build alliances with investors, customers, and other people so they can help each other when it comes to raising money. It may help entrepreneurs build better and learn how to ignore a high valuation from a well-vetted partner, but more interestingly, it may help them get an outside investor to write a check. One to two minutes of work can save time, resources and a doomed relationship, but investors have to get comfortable with the idea that a founder may already pinged a portco before they pitch you.
