Mon. Jan 17th, 2022

A few years ago, VCs were expected to perform extensive due diligence on startups. Investors dived into the financial sector, calling clients and vetted founders.

But power has now shifted to the founders after a long string of investors who held more than half of the power thanks to the commoditization of capital. The pace at which deals were closed increased and the time to achieve what VCs like to call “persuasion” fell sharply. These compressed due diligence cycles, leading to less intrusive checks.

The acceleration of venture capital and the rapid growth of checks in recent years have led to a decline in traditional due diligence. The full impact of private market investors doing less preliminary research than in previous years and cycles will not become apparent for some time.

But in the meantime, we can see some obvious ripple effects: Driving up valuations can lead to undue pressure, causing startups to rush product development and recruiting, and faster audits can lead to over-reliance on existing networks, causing an already brutal gender. is exacerbating fundraising gap. Add to that Tiger Global’s concept of bringing due diligence to deals, and pre-emption becomes the norm, with venture players rapidly changing how they make decisions.

BestFitnessBands’s Alex Wilhelm, Natasha Mascarenhas and Mary Ann Azevedo, the trio behind the Equity podcast, dive into what’s in store for startup due diligence.

Natasha: Informalization continues, so long live the back channel

Back-channeling has long existed in technology and across industries as a way for two parties to exchange information about a third party in an informal and hopefully illustrative way. In venture investing, back-channeling can be used by an investor to control an entrepreneur they want to transfer millions of dollars to – or vice versa, by the spunky founder who wants to make sure the money behind his money is stable. The process also helps prevent predatory investors from winning deals because, well, founders talk.

“Founders need to get their heads out of the clouds a bit and pay attention to what the investors can bring to the table.” Mary Ann Azevedo

The venture capital market doesn’t seem to be slowing down, so I expect next year to see even more emphasis on back-channeling in the world of first check fundraising. The broader argument behind the growing importance of back-channeling is that the only way to keep up with quick checks is to provide more channels for gut checks.

Previously, due diligence looked like a months-long process of successive face-to-face meetings. But with founder-friendliness becoming the norm, it’s more important than ever for business owners to assess the check writer, understand their options, and better navigate this capital-rich environment.

Founders will have to form alliances with investors, clients, and even other founders so they can help each other when it comes to fundraising. This can help get an outside investor to write a check, but more interestingly, it can help entrepreneurs just build better and learn how to ignore a high valuation from a vetted partner. On the background, investors should feel comfortable with the idea that a founder may have already pinged a portco before they pitch you – it’s a one to two minute job that can save time, resources and a doomed relationship.

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