Due Diligence in VC Partner Selection

As first-time CEOs and entrepreneurs embark on their journey into the world of venture financing, it is crucial to understand the intricacies and potential pitfalls that may arise when engaging with venture capital (VC) partners, firms and funds.

Before delving into this post, let me assure readers that I firmly believe in the value of venture capital; the technology industry would not be where it is today without the contributions and insights of those who saw potential in unproven technologies and solutions.

Furthermore, I sincerely believe that the majority of venture capitalists excel in their roles, demonstrating honesty and integrity, and are capable of providing strategic insights that guide emerging companies through unknown waters. I could name more than a dozen VCs whom I admire, count as friends and are totally trustworthy, and actively refer startups to.

However, like any industry/profession, the VC landscape is not immune from instances of exaggeration, misinformation, or even deceit. These misleading practices can manifest through various channels, including public statements, media interactions, reporting to limited partners (LPs), case studies at leading business schools, and internal discussions within VC firms. Such behavior is not limited to any particular size or type of VC firm.

Several factors may contribute to these practices, but none more prominent than good old-fashioned greed. VCs face pressure on many fronts — from the fierce competition to attract funding, to the pressure to showcase impressive investment portfolios awash with tombstones of successful IPO and M&A outcomes. As we see in all endeavors, pressure plus competition creates opportunities to show the best, and worst, of human character.

To summarize the prelude: the advice to first-time CEOs is to go into fund raising with “eyes wide open.”

Unpacking that, to mitigate the risks associated with misleading claims and overblown narratives, entrepreneurs and CEOs should consider the following:

• Conduct thorough due diligence: Vet VCs with the same caution they are vetting you with. Seek objective evidence to support their claims, verify the track records of both individual partners and the firm as a whole, particularly when dealing with veteran VCs who may be more adept at crafting fictitious narratives.

• Maintain a healthy scepticism: Be cautious of the information presented, even from seemingly reputable sources. Pay-to-play arrangements, where VCs may influence the content of publications or case studies, can distort the true picture of their performance and capabilities.

• Seek independent opinions: While former CEOs or other industry insiders may provide valuable insights, it is essential to recognize that their perspectives may be influenced by their ongoing relationships with VC firms. Seek out unbiased and objective sources of information to inform your decision-making process.

I reiterate that most of the VCs that I know are good people, not liars and do the right thing. The cautionary note is there are exceptions.

By approaching the VC landscape with discernment, conducting thorough research, and fostering relationships with trustworthy partners, entrepreneurs and CEOs can navigate the complexities of venture capital more effectively. While the presence of misleading practices is a concerning reality, it should not deter individuals from pursuing the valuable opportunities that VC funding can provide. Instead, it serves as a reminder to remain vigilant, rely on facts, and make informed decisions based on a comprehensive understanding of the VC ecosystem.

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