The Need for Investor Due Diligence

Hey everyone. Welcome to another episode of investream. I'm Bankaj and today I'm going to talk about investor due diligence coming up next. Everyone, welcome back. Investor due diligence is something that is incredibly important, but it's something that not many people talk about frequently enough. I've mentioned this in a couple of other videos in the past, but I wanted to dive in based on some conversations that I've had this week. I was talking to a founder who has received a offer for a fairly large investment. The founder and his co founder are very well respected, very well known in their areas of expertise, and they don't have an MVP or a product yet. They have an idea. They have some folks that are interested in doing a POC with them and this investor came forward and offered them a fairly large investment for relatively reasonable equity stake. One of the founders knows the investor, has known him for a number of years. They haven't worked together in any sort of way, but they've known each other. So it made it a bit easier to go out and raise money. That I believe is the only investor they've spoken to. The reason that the founder wanted to talk to me was because there were some red flags that went up even before the term sheet was received. The investor started talking about some of the things that the company should be doing, who they should be hiring, specific individuals, not just roles. And another thing that came up was one of the founders is going to be a part time founder. He's not quitting his job right now, so the amount of equity he's getting is going to get cut down substantially. Another thing that he brought up was creating a option pool that was significantly larger than what most seed rounds typically do. By themselves, any one of these things is not a problem, but together they made the founders somewhat apprehensive about taking this money. And so they wanted to chat. So I spoke to them and I said, look, you know, none of these things by themselves is an issue, right? Like most investors don't want to see dead weight on a cap table. If a founder has left or is part time, they want to see that extra equities cut down as much as possible or the founder who has left to sell back their equity to the company. So just so there's a clean cap table creating a option pool that's larger than normal. Okay, but you know that that can be discussed and figured out. The real challenge was that together all of these things were making the founders nervous. They started feeling like, you know, one they're going to lose not just control over their company, but they're going to lose control over the vision of what they want to create and what they want to build. They need to move beyond their fears by doing their due diligence. Part of doing due diligence is talking to other founders. Talk to founders that have raised money from other investors and see if they've come across these types of situations, how they've dealt with it. And specifically talking to founders that have raised money from this investor. Gave get to know them, spend time with them, talk to them, see what it's like to work with this investor. You know, how does this investor react when things are going poorly? Are they supportive when things are going poorly or they want to take a slightly different direction, or is the investor a little bit more aggressive in putting their ideas forth and having those ideas implemented? Really just get some ideas from other founders on what it's like. I also suggested that they lay out a plan for the next 12 months of what they want to accomplish, how they're going to accomplish it, who they're going to need to hire, how much is all of this going to cost and where they want to be at the end of 12 months and present this to the investor and see what the investor's reaction is. Based on the reaction that the investor has, you can get some idea as to whether the investor is going to be supportive or the investor is going to try and push their agenda and how they want things to work. And you know, as a founder, you then have enough information to make a decision of whether the money is going to override the vision and your operating plan, or if the vision that you have and how you want to run your company is going to outweigh the capital. Right. There's plenty of other folks that you can raise money from. You. You might actually have to build an mvp. You might have to go out and have some signed POC agreements or something. But you know, you can raise money from other folks. This is not the only investor that's out there. If it's not a right fit, it's a good idea not to even move ahead. But you're not going to know it's a right fit until you do some work and do some due diligence around the investor. I hope the video was helpful and I hope it highlighted some of the reasons why it's important and to do due diligence. It's not that one way is better or worse than another. It's. It's more of is there chemistry and is there alignment between the two parties? And really, by doing due diligence on both sides, the founders are going to should do due diligence and the investors want to do due diligence. So bringing the two together, you should have a better picture of whether this relationship is the right one for you to start investing in. If you've got other suggestions on how to do due diligence on investors and what some of the things that you've done is, please share them in the comment section below. I'm sure lots of other founders would benefit greatly from that information. And if you haven't yet subscribed to my YouTube channel, please go over to YouTube. The link is in the description below. If you haven't subscribed yet, please hit the subscribe button and make sure you hit the bell so that you don't miss out on a single episode of investream. Thanks again for joining me. I'll see you again next time.