What is the Due Diligence Process in Venture Capital?

An article we liked from Thought Leader Allison Weil Lechnir of Hyde Park Venture Partners:

VC Explained: Diligence Process

It’s been a while since I last wrote in this series, meaning to democratize how venture capital works.

See my stories here on how we find companies and the best way to tell a VC-oriented story. I’m finally getting around to another topic - how do we decide to make the investment?

Now - to be clear here, every firm is different. I’ll give some insight into how HPVP does this work, which definitely starts with the first conversation (go back and read the storytelling entry for more information here). There are some funds (and definitely a lot of angel investors) who will cut a check after the first conversation. They like you, they like the idea, here’s some money. That is fantastic - but tends to be smaller checks that won’t necessarily enable you to raise the amount you want to or should. They’re also probably cutting a lot of checks - and so if you’re looking for a deep relationship and guidance from your investors, they might not be the ideal partner.

There are also a lot of thesis-driven funds - funds that focus on a particular functional area (say, fintech or healthcare) and then within that specialty have highly developed points of view about what an interesting idea or investment looks like. They’ve spent a lot of time researching a corner of the industry, have a sense for all of the major players, the holes in the market, etc - and may be talking to you because what they saw just from publicly available information (or heard through the grapevine) was close to their hypothesis. In that case, much of the research about the market opportunity is done ahead of time, and they want to learn about you as a founder, the deep details about your product, and see how you’ve executed so far - so will spend more time digging in there.

Hyde Park Venture Partners is neither of these things. We do relatively deep diligence on companies prior to investment, and it can take anywhere from a couple of weeks to a few months to make an investment decision once we’ve decided to start digging in. We are also a generalist fund - we all know a little about very wide range of topics, but are true experts in very few areas. The latter means that when we see something new that sounds interesting, we need to get up to speed on it quickly and form a perspective, even without all the information

In the diligence process, there are four core things I’m looking to build a firm perspective on. Three of them we’ve definitely talked about in the first call - the team, the problem/solution, and the evidence of success. The fourth is the...