A common observation made by fund managers, limited partners, and (interestingly) journalists on the 2 year-long startup boom is the speed of some of these deal closures – primarily by skimping (or skipping) due diligence on deals before investing. I
A common observation made by fund managers, limited partners, and (interestingly) journalists on the 2 year-long startup boom is the speed of some of these deal closures – primarily by skimping (or skipping) due diligence on deals before investing. I regularly get advice from well-wishers within and outside our offices to reduce the due diligence standards to improve the number of deals we can complete.
I am a firm believer that due diligence is vital for the sanctity of the founder-investor relationship. When things go wrong (as they sometimes do), lowering due diligence standards could transform an unfortunate situation into a terrible or litigative one. Besides, founders can prepare their startup and themselves for due diligence before raising their round so that the process can get completed smoothly and in time.
However, we must challenge our beliefs & habits periodically to decipher if the core premise on which we had built those beliefs, is valid or whether it needs an upgrade. This exercise may strengthen the conviction around those practices or require the creation of entirely new pathways to stay “ahead of the curve.”
One such exercise took place during the final week of 2021 as I gobbled up the pages of The Billion Dollar Whale. I do not remember why this book sat in my kindle library for almost a year, but I started reading it because of its intriguing title. Yes, I judged a book… by its cover!
The story of Jho Low is interesting; what truly grips attention is Bradley Hope & Tom Wright’s writing style. It alternates between empathizing, sympathizing, and ridiculing the obnoxious way that an odd and shy Malaysian of Chinese descent entered the power circles of the Middle East, global financial services, American politics, New York’s high society, and inner rings of Hollywood.
It is not an enigma that Jho Low had penetrated these various circles; what was surprising was the speed at which he broke into these secretive societies – all in a matter of years while throwing wild parties that were (almost) completely stage-managed!
Just anyone who would do their due diligence on Jho Low would have realized that his story of Malaysian royalty was built on a pack of cards. He blatantly stole over $600m from the Malaysian sovereign wealth fund (1MBD), wiring the money to accounts that sounded like actual entities. The fund wanted to get in business but was entirely controlled by Jho. Besides, most of the investments done by 1MBD were built on flimsy financials and exaggerated earnings waiting to get discovered only if someone stuck a probe just 1 inch below the surface.
Unfortunately, no one did, and the con went on, and it got bigger over the course of a decade. It led to billions of dollars of hot money going through the global financial ecosystem. Jho’s grand plans demolished the cloak of financial security that we may believe all our banking systems operate under. This con continued for almost a decade, it got more prominent, and it started getting even bigger sovereign wealth funds embroiled into messy soup – no one is immune to a well-crafted story.
The book is a page-turning must-read book.
I hope they make a movie out of it – hopefully financed by the 1MBD fund (which also funded Wolf of Wall Street indirectly) and recover the billions that the Malaysian people have lost and are on the hook to repay in the years to come.
In the end, I reinforced my belief that it was better to lose a deal than to rush through due diligence because not only is it our money at stake, but other players like our co-investors, employees, suppliers, partners, customers, etc. rely on our investment confidence to develop relationships with entities & people that they did not previously know.
The greed to speed through deal processes to reach the top of investors’ lists cannot justify the mayhem & loss of confidence in this entire ecosystem due to a deal
gone done wrong!