It's a little different in Venture Capital because exits follow power laws. So the big mistakes are literally the opposite of insurance: it's okay to make a lot of losing investments as long as you don't miss Airbnb. Missing out on Airbnb because you got stuck on it being 3 designers and no engineers is way worse than investing in Airbnb and 49 companies that go bankrupt.
Perhaps you do not use the term "due diligence" the same way that it's used in the investment management industry, which to be clear, includes "Venture Capital."
"Due diligence" does not mean making a judgment call on whether three designers can build, scale, and operate a tech company. Due diligence means diving into the details of a company you are going to fund and checking, among other things, that the things they've said are valid and that there are no skeletons in the closet.
Don't get me wrong: due diligence sucks for all parties involved. If you are investing your own money, you have the right to do as little work as you want and skip it, but when you are entrusted as a fiduciary of someone else's capital -- and paid for the job -- it comes with responsibility.
There are other factors, like Time, that influence the diligence process for (seed stage) venture capital. Investments are made at a fast cadence, which is good for founders and for investors. A seed fund might see 1000 companies in a year and invest in 10. That allows for a few hours spent on each company, but not much more than that. Similarly, a founder might meet with 50 or 100 investors before closing their round. 1-2 hours per investor will take a few months, but if investors spent too much time on diligence then a founder could spend all year just answering investors' questions. That would be like a twisted variant of the Uncertainty Principle, where just going through fundraising process basically dooms a company to fail because of the time required.
Given that time is a factor and given that I have 2-4 hours to spend with the companies I'm most interested in before making a final investment decision, I've gotten the most value out of spending 95% of that time on non-tech diligence. YMMV.
That does make sense. Investor & Founder time is limited, technical due diligence on the investor side takes too much time.
I'm coming more from a founder perspective though, and I think there's some dangers with the mindset as a founder, and I see it with a lot of people in the chinese startup community.
Whilst as an investor, one might get to play a bit fast and loose with technology choices, I believe that as a founder doing so is suicidal. I see startups here struggling to hire PHP programmers because they made the decision to go with PHP because they heard it was easy, and later on realized that that may have been a mistake. They try to smooth it over with funding later. PHP programmers over here have the same reputation. They learn it because they thought it was easy, and that there's a lot of companies desperate for that skill. It's a match made in hell.
Similar boneheaded decisions, preventable with a week of due dilligence reading, are made by founders here all the time. One thing I found interesting is that the people making these kinds of calls are always working on C-list ideas. It's always derivative businesses in markets that just don't care. They need to get their MVP out fast and half baked because what they're working on should have died on the drawing board. They're desperate for investor money because they think it will patch over major errors they've made up to that point.
Some of these ideas are salvageable. It usually requires restructuring on both the business side and the technology side, preferably to the point where they make sense as an integrated system. One guy I was working with, his startup is trying to create a site for farmers and rural Chinese to sell things on that, and that is so interesting, Alibaba jumped into the ring recently. Now he has a dinky site that does not solve anyone's problems. It's a website, which is greatly hindered by the fact that most villages have a single computer, and the people who wanted to trade with each other would sit at that computer, together.
I suggested to him that he change things up a little. Small farmers do suffer from information asymmetry with the people they're selling to. Technology wise, most of them have non-smart phones, but China Unicom is rolling out mobile coverage to rural China, because that's their market tomorrow. So, provide informational and automated brokering services over a website on the buyer end, and an SMS gateway on the seller end. Ship the FAQ on actual paper.
Allow farmers to post their wares with a formatted text message, have offers coming in an hour later, goods shipped the day after. Give them a reason to upgrade to smartphones, pack in more features on the app once data becomes cheap. Do agricultural futures 5 years down the line, in one of the hungriest economies in the world.
The part where technology makes this interesting is that it allows you to reach a market segment that is unreachable over conventional means. Innovation is the edge startups have over large, well funded enterprises. Founders ignoring that side are blindsiding themselves to half their business.
Thanks. I didn't understand either. I guess I am cynical on this topic because all my career I've dealt with people complaining about DD rather than reframing it into an opportunity to learn and limit downside.
