The way an investor looks at a time when doing his due diligence on a startup is very different from the way an entrepreneur does. For an entrepreneur, the negotiation with an investor is just one of the many hurdles which he needs to cross in order to make his startup successful. He wants to pitch and get the money so that he can then focus on what’s important – moving on with growing his business.
He is looking for an investor who will give him the cheque as quickly as possible, at his chosen valuation. He wants to expedite the due diligence process quickly because speed is important. The longer he spends on raising funding, the less time and energy he has on building his business and delighting his customers. This is why entrepreneurs think of funding as a distraction – something which is painful, but which they should get over with as quickly as possible.
An investor’s viewpoint is obviously completely different. He is taking a big risk in deciding whether he should be giving you his money or not because he doesn’t know enough about you. For him, time is his friend. The more the time he spends on doing his due diligence, the more he’ll understand about you, your team, your business, your weaknesses, and your strengths. He will be able to judge whether you’re capable of compensating for those weaknesses and implement your business plans.
As an entrepreneur, you’re naturally going to be very biased. Everyone entrepreneur thinks his startup is the best in the world, and that funders should line up to give them funding, because they have such a cool idea, and are so accomplished.
However, this is not the way the investor looks at the world. You are one of the many startups who is pitching to him, and because he has limited funds, he needs to decide whom to give them to. It’s quite possible that even though you may be an A grade founder, there is someone else who is an A-plus, who he thinks is more likely to give him a better return on his investment. This is why he selects him for you.
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While investors understand your anxiety about moving on with the due diligence process quickly, you must understand that it takes time to do this properly. You can’t hurry this up. The investor needs to look you in the eye; to check the chemistry between you and him; assess how stable your team is and whether you work well together. This is a time-consuming process because he has other startups to evaluate as well.
Trying to take shortcuts in the due diligence process ends up hurting investors, and we have learned this the hard way. Also, investors work as a team, which means even if one person in the team likes you a lot, but someone else doesn’t, then there’s very little you can do about it. The truth is that everyone on the investor team has to agree before they will actually sign that cheque because there’s so much at stake. The sooner you accept this reality, the better for you. Yes, this can be frustrating because you have one person on the team who seems to play the good cop and is very enthusiastic and excited about funding you, while someone else plays the bad cop, who finds 50 reasons why you’re not the right person. Every time you feel, “Oh great the deal is closed. I’ve answered all their questions and doubts, and finally, they should be happy,” when a new set of queries comes up the next day!
Now it’s not like investors are trying to harass you, but it takes them time to get up to speed about exploring your domain and your startup. As they dig deeper, they will have more questions, and you just need to be patient.
If you are mature and learn to look at the world from their perspective it makes complete sense as to why they’re doing this systematically and methodically. In fact, this is in your best interests too, because they will be able to pinpoint what’s wrong with what you’re doing. They can highlight what your weaknesses are, and you can use this feedback cleverly in order to do a better job. It’s like getting the advice of a McKinsey consultant – for free! Even if they end up not funding you, thoughtful insights from an expert investor will help you run your startup better!
Yes, it’s true that not all investors are well-organised; and some even seem to take a perverse delight in leaving entrepreneurs hanging for their replies. This is sad, and these investors harm the entire ecosystem, which is why you should be picky and choosy about whom you choose to raise funds from.
I agree it’s not much fun when you hear a No from an investor, especially after you have spent so much time and energy on the due diligence process. Yes, it can be heartbreaking, because that means you have to start the exercise all over again with a new funder. However, you will get incrementally smarter, and it will become easier for you, because your pitch will be more polished, and you will have better answers for many of their questions. You will have learned exactly what they’re looking for and will be able to tailor your presentation accordingly.
Lots of honest entrepreneurs will agree that their startup has become much better because they went through the trial of fire by due diligence, and if done well, everyone benefits from this process.
[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]