Running a Thorough Diligence Process

I just finished up a few weeks of diligence on an investment that we are very excited about. In a final discussion with management, we spent time talking through some of the reference feedback, which proved to be very insightful for the business. 

The experience got me thinking about the diligence process. There seems to be a fixation on making rapid decisions in today’s market. While I’m in complete agreement on quick indications of interest, I feel like the diligence process is getting too much of a bum rap. If investors are sincerely interested in moving forward, they should make a commitment to do so and only back out if they uncover some dead bodies. However, I think it’s worth taking a few weeks to do the digging.

Entrepreneurs deserve to have their potential investors spend a few weeks really learning about the business opportunity. This can be achieved with relatively little time demands from the company, other than typical legal requirements. Diligence can even provide benefit to the company if investors introduce them to potential customers as part of the process.

Reference calls for clients, partners and management are the biggest bottlenecks of the diligence process, but they also provide the best feedback. This educates potential investors on the quality of the product or service, its differentiation in the market, and the strengths of the team.

Any investor should be able to give the company’s pitch as if they went through sales training. Investors can add value by helping solicit new customers, partners, recruits, other investors, and buyers of the company. A thorough diligence process prepares investors to add this value post close.