Many founders, angel networks, brokers, co-investors and others who we interact with ask us why we take so much time doing our due diligence so here is my answer to that.
Our due diligence processes are lengthy, arduous, irritating and most importantly slow – that is by design.
Due diligence like the word itself says that there be a “diligence” in the processes that are followed. Our due diligence teams aren’t just on the lookout for legal & compliance issues that your company may or may not have – that is the easy part and we have outsourced those functions to professional teams that do a fantastic job.
Our internal team is on the look out to validate all the claims that were made by you in your presentation, business models, financial models & meetings.
So, when you claim that your company will save 40-50% of the costs the are currently incurred or that your product cannot be replicated or that you have an EBITDA margin of 20% we verify all these claims. We speak to your university, your ex-colleagues, your ex-bosses to get a background on you, your propensity to deal with pressure and whether you are someone we can trust. We get our associates to buy your product and service and that of your competitor(s) and give us feedback on the difference between your offering and theirs.
Then with all this feedback and learnings we rebuild your business model. People on our team will take positions of the founder and argue and counterargue points raised by one another. We bring in economic data to validate our points and we involve the vast network of our friends & supporters to validate or repudiate our arguments.
While all this is going on we keep a tab on your business and whether it is increasing or decreasing. Is there an uptick or downtick, has something happened within the business or outside that can affect or catalyse the venture’s prospects? How do you cope with that change? How do you respond to our findings? Are you evasive? Do you have a solution? Do you ask for help? Do you have someone who you can go get help from? Yes, we are watching you all the time.
Besides the money, I give you I can earn again… but I am making a commitment to you of our time resources which are perishable. I cannot earn them back even if I want to. So, it is my instructions to our team that they be clear on supporting a venture because to find out after we invested that we had doubts that someone didn’t bring to the table will waste of our time – and time is not something I have.
Why is this good for a founder?
Can you imagine how much information we have collected and the amount of effort we have made before we have put a penny into your company? None of these resources have come free and the time and effort we have put in pays off handsomely because our recommendations come from a epicentre of knowledge and aren’t us throwing darts at a wall. Even as a founder, I could not buy that knowledge even if I wanted to. Secondly, it is better to have the surprises out on the table before we solemnize the marriage than to regret what we knew but didn’t investigate or ask after we have been pronounced investors & investee.
I have no qualms of walking out of a deal or being pushed out of a deal because our due diligence processes are invasive. If all you have said can be backed up in our due diligence it will increase the value of your words. However, if you believe that too much of your presentation was fluff and you cannot back it with numbers – expect us to find out and to make appropriate changes to the deal terms.