As Theranos shows us, every investor does different types of diligence, especially given the stage.
- There’s only so much you can learn in early stage start-ups.
- You can diligence the founders (everyone does this, albeit differently)
- You can call the customers (everyone does this)
- You can call ex-customers that churned (few do this, I do sometimes)
- You can talk to their ecosystem partners (but often you learn less than you’d like when it’s early stage)
- You can talk to their peer CEOs (friends in YC, etc.). This is helpful but you can get a lot of false negatives and false positives.
- You can judge the quality of the founders (for me, the CEO has to be better than me, adjusted for time)
- You can do “technical due diligence” and see if the platform will scale, etc. But for SaaS at least, this is of limited benefit these days. These days, that’s less and less informative. Great founders always find a way.
- You can understand if the market really will be large enough. But this doesn’t take that long.
- You can look for flags (to me, the #1 job)
To some extent, most VCs make decisions pretty quickly if the investment is in their sweet spot. I’ve built software and I’ve shipped business software. So I make “B2D” and “B2B” decisions pretty quickly. I can make a tentative decision in 20 minutes and do all my diligence in a week or so. But anything outside of those two areas, I might need weeks or maybe even > 1 month to do my pre-investment decision diligence.
Also risk taking is embedded in price. If the price is appropriate to a certain stage of risk, the diligence is simpler. As the price goes up relative to the risk, the diligence bar can go way up.