So you’ve probably heard that angel investors, venture capitalists and private equity firms will do due diligence on your company before investing in or acquiring your company.
This diligence which can be detailed or as some call it “invasive” (this obviously depends on the firm and your relationship with them) makes sense since these groups are investing in your business and so there return is dependent on you and your business being a winner. They need to ensure they are getting into bed with someone and a company that has represented itself accurately.
But due diligence is not a one way street.
You as an entrepreneur also need to do reverse due diligence on investors.
Sometimes this is referred to as entrepreneur-investor fit, but that usually seems to refer to the point at which you are having discussions with investors. There is a lot that should be done prior to discussions and this process in aggregate is Reverse Due Diligence.
Reverse due diligence should be done at several steps in the process to acquire investment from a venture capitalist or angel investor:
You will notice a couple of things about this Reverse Due Diligence guide. The early parts of the entrepreneur and investor dance are more about facts and the firm (or group if dealing with an angel group). As you get further in the process with them, Reverse Due Diligence becomes more about the individual at the firm or group you are dealing with and becomes increasingly about softer, less tangible factors. Of course, if you are dealing with an individual angel investor, the firm or group level elements are still applicable but just focused on the individual.
We anticipate adding to this Reverse Due Diligence Guide over time based on your feedback. We also owe a debt of gratitude to the many entrepreneurs who shared their insights and occasional war stories with us as many of these words of wisdom have been integrated into this guide.
If you are an entrepreneur who is going through or who has gone through the process of raising money from angels or VCs or if you are an investor with additional thoughts on what entrepreneurs should be doing as part of their Reverse Due Diligence process, please email us info(at)chubbybrain.com.