Here’s how founders can do their due diligence on VCs

Some time ago, a founder asked me a bold question at the end of a pitch: “Can I speak with a few founders in your portfolio?” He wanted to learn more about what we do for startups and how we work with founders on a day-to-day basis.

In other words, he was doing due diligence on his potential investors.

Image credit: Timmy Loen

I later heard that this could have gone worse for him because not all investors appreciate being on the receiving end of due diligence. As for me, I was pleasantly surprised to hear that question.

This was the first time a founder made such a request of me. I was impressed by the pitch and this was the icing on the cake.

With just one question, he showed me he was a founder who would protect his business and his team; a founder with both leadership and guts; and, perhaps most importantly, a founder who would ask the difficult questions of his partners and investors to drive the company forward.

“I will invest in him, even if I don’t invest in his business,” I thought to myself after the call.

Which begs the question: Why don’t more founders do due diligence on investors?

The process of raising capital can be daunting. Among other things, founders are under pressure to deliver a perfect pitch, convey a scalable business model, explain deep technology in simple words, and convince investors that they are the right person to change the world.

However, these things shouldn’t stop founders from doing due diligence on potential investors. In any other context, a smart founder would thoroughly evaluate potential business partners to make informed decisions. Raising capital should be the same, if not held to an even higher standard since VCs tend to have outsized influence on a company’s development – especially if they have a seat on the board.

So what should a founder seek to discover about a potential investor? Here are some questions to ask:

Do your visions align?

Nothing destroys morale and stability faster than investors demanding a completely different strategy from the founders’ vision – IPO in 10 years or M&A in five years? Customer focus or branding focus? Asia market or US market?

The list goes on. In my experience, this is usually the root cause of founder-investor tensions.

How much attention will you get? How much do you want?

The same investors can be engaged and add amazing value to one founder but be intrusive to another. It all depends on how involved you want your investors to be.

Do they deliver the value you need?