What is meta due diligence for venture capital investment?

By: Peter Adams Friday March 17, 2017 0 comments Tags: Peter Adams, Rockies Venture Club

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By Peter Adams

Executive Director

Rockies Venture Club 

Everyone knows that VCs and Angel investors conduct due diligence on companies before they invest.

Angels who do 40 hours or more of due diligence outperform those who do not by two-to-one on their returns. Due diligence involves checking out the company, the team, the strategy, product, IP, customers, technology, the market, finances and more. There are well-known processes and checklists to go through when conducting due diligence.

There is another type of learning that happens during due diligence and it has nothing to do with patents or markets – it’s called “meta due diligence.” This is what investors learn while going through the process and watching how the company responds to questions and requests for information. It’s not the answers themselves that are revealed in meta due diligence, but the character of the team and how they think.

I recently worked with a company through the due diligence process and it quickly became clear that they had not done the kind of financial planning that a startup should do before raising capital. This is not necessarily unusual, but what was enlightening was that they were so resentful for having to do the work and create a believable proforma financial projection. They took a long time and it became clear that finance was not a priority for the CEO. This was a red flag because someone like that could blow through our investment without much understanding of how to get the most out of it.

Another company was a polar opposite and the CEO said to me, “I am going to have the best due diligence drop box you have ever seen!” He had all the homework done and was proud of being able to organize it in a clear way so that it would be easy for the due diligence team to find.

Another type of meta due diligence is now becoming important and that has less to do with the investor’s relationship with the company, but with other angel groups or investors on the deal who are doing due diligence. When they hand you a due diligence report, is that something you can believe? A smart investor isn’t going to take someone else’s due diligence at face value and they’ll check it out themselves and at least spot check the research work done by the team.

All of these types of meta due diligence are valuable and sometimes even more valuable than the information you might find during a normal due diligence process!

Peter Adams

About the Author: Peter Adams

Peter Adams is co-author of Venture Capital for Dummies (John Wiley & Sons. 2013) and serves as the Executive Director of the Rockies Venture Club, America’s oldest angel investing group.  RVC is a non-profit organization furthering economic development in Colorado whose companies raised over $23 million in the past year.  RVC’s connects investors and entrepreneurs through conferences (Angel Capital Summit and Colorado Capital Conference), networking events, angel investing educational offerings and facilitation of Colorado’s largest angel investor groups.  Peter is the founder of the Biz Girls CEO Development Program for high school age girls and is an Adjunct Professor in the Colorado State University EMBA program. Peter holds a BA Degree from Colorado College, PhD/ABD from University of Colorado and an MBA from Regis University.