VCs used to be required to do considerable due research on companies a few years ago. Investors dug into the numbers, spoke with consumers, and investigated the entrepreneurs. However, owing to the commoditization of money, power has swung back to the founders after a lengthy period in which investors held more than half of the power. The speed with which deals were completed rose, and the time it took to attain “conviction,” as VCs like to term it, decreased dramatically, Due diligence cycles shortened, resulting in less intrusive screening.
Traditional due diligence has been on the decline in recent years due to the pace of venture funding and the increasing check sizes. It will take some time to see the full impact of private-market investors performing less due diligence than in prior years and cycles. However, we may witness a few apparent ripple effects in the meantime: Faster checks can lead to an over-reliance on existing networks, exacerbating an already brutal gender fundraising gap.
Inflated valuations can lead to unnecessary pressure, forcing startups to rush product development and hiring, and faster checks can lead to an over-reliance on existing networks, exacerbating an already brutal gender fundraising gap. Preemption is becoming the norm, with venture players fast changing how they make judgments, thanks to the notion of Tiger Global bringing pre-diligence to deal-making.
Natasha: Informalization will continue, and the backchannel will live on. Back channeling has long been used in IT and other sectors as a mechanism for two parties to share information about a third party in a casual and hopefully instructive manner. Back channeling can be utilized by an investor to vet an entrepreneur they are ready to transfer millions of dollars to, or by the sassy founder to ensure the money behind their money is secure. Because, well, founders speak, the procedure also helps prevent unscrupulous investors from winning deals. “Founders need to get their heads out of the clouds a little and pay attention to what investors have to offer.”
Because the venture market does not appear to be slowing down, I anticipate a stronger emphasis on backchanneling in the field of first-check fundraising in the next year. The larger reason for back channeling’s increasing relevance is that the only way to keep up with quick checks is to provide additional channels for gut checking. Due diligence used to be viewed as a months-long procedure including back-to-back in-person meetings.
However, as founder friendliness becomes the standard, it is more critical than ever for entrepreneurs to evaluate check writers, understand their alternatives, and navigate this capital-rich market. Founders will need to form alliances with investors, consumers, and even other founders in order to assist one another in obtaining funds.
This might help entrepreneurs obtain an outside investor to write a check, but it could also help them create better and learn to disregard a high value from a well-vetted partner. Investors must get used to the concept that a founder may have previously pinged a portco before pitching you — it’s a one- to a two-minute task that may save time, money, and a disastrous relationship.
