November 8, 2016
Chelsey Franks, CFE
Vice President - Investigations
Gone are the days of the investor scrambling to throw money at the latest tech startup. Recent history has turned the tables, making investors more cautious and forcing startups to answer more questions and provide more backup before they can get money in-hand.
As recently reported in The New York Times, “Investors [now] have the advantage. Instead of venture capitalists begging to be allowed to invest, entrepreneurs are coming to them begging for cash. Investors are exerting their newfound power by asking more questions about a start-up’s prospects and taking more time to invest. Some are pushing for management changes or for financing terms that would help cushion any losses they might face.” A partner at Menlo Ventures, a Silicon Valley venture capital firm, was quoted in the article as having remarked, “Venture capitalists are putting founders through everything short of a proctology exam before they invest.”
Along with this is (or should be) increased and more thorough due diligence activity conducted on a target prior to investment. As noted in the article, “’Investors have materially more time to do diligence than before,’ said a partner at venture capital firm Khosla Ventures. ‘Across our portfolio, even for the best companies, fund-raising is a longer process.’”
The list of excuses for not doing your due diligence continues to grow ever-shorter.