When it comes to investing in early stage ventures it’s easy to understand why due diligence should be conducted on the company but it may surprise you to find that we suggest that conducting your due diligence on the lead investor is just as important.
The reason for this lies in the responsibilities placed on the lead investor which Bee Partners, a San Francisco based VC, summarises beautifully below.
Have sufficient bandwidth to be constantly thinking about how to help mitigate a Company’s risk, and improve the likelihood of Company success
Always be available to the company, its founders and its underlying investors, regardless of the stage and pace of progress
Advise, evangelize and advocate on behalf of the company, especially so when the progress is not yet headed up and to the right
Be in the business of serving to company build, rather than investing.
Have sufficient depth to replace capital if, in a sideways or bridge round, the underlying investors elect not to participate
Be experienced and professional enough to accept the reporting requirements that the underlying investors should expect
As you can see, it’s much more than just money that the lead investors contribute and hopefully you can start to see why doing due diligence on the lead investor is so important. And while each case will be different, you can use the framework below as the base for the due diligence you should be looking into regarding the lead investor.
Is the lead investor a group or a person? If it is a group, try and find out who within the group is likely to be most involved.
Who are they and how well do you know them personally? The more you can tell about the character of the individual, the more likely you can understand how they will react if things go well or things go wrong. Keeping a cool head is very important, especially given the level of risk involved with these investments
What do they do professionally? Nesta’s report tilted Siding with the Angels shows that investors who have specific knowledge and experience within the industry of the investee company are more likely to see returns than those who invest in industries where they do not have experience. If you do not have the specific industry experience of the investment, invest with people who do.
Do they have a track record of investing in early stage ventures? Look at both failures and successes and more specifically look at their track record for investments made in the same industry as the current opportunity.
What more can they provide the company beyond money?
Use Bee Ventures responsibilities list shown above to determine if the lead will be able to meet all of the responsibilities that they are likely to face.