The Business of Venture Capital: Insights from Leading Practitioners on the Art of Raising a Fund, Deal Structuring, Value Creation, and Exit Strategies, 2nd Edition

CHAPTER 16 The Art of Conducting Due Diligence

“Conrad was a speculator . . . a nervous speculator . . . before he gambled, he consulted bankers, lawyers, architects, contracting builders and all of their clerks and stenographers who were willing to be cornered and give him advice. He desired nothing more than complete safety in his investments, freedom from attention to details and the thirty to forty percent profit, which according to all authorities, a pioneer deserves for his risks and foresight. . . .”

—Sinclair Lewis, Babbitt (1922)

Most venture practitioners would agree that “a pioneer deserves 30 percent to 40 percent profit . . . for his risks and foresight,” although they may not necessarily agree with Conrad's style of due diligence. Yet due diligence in venture investments seldom follows a structured approach and often is conducted in a free-flowing manner.

Due diligence is the art of sizing up an investment opportunity—its potential and risk. Entrepreneur and venture capitalist (VC) Peter Thiel is the cofounder of companies like PayPal and Palantir. “Great companies do three things. First, they create value. Second, they are lasting or permanent in a meaningful way. Finally, they capture at least some of the value they create” he points out.¹ According to Thiel, durable start-ups create something new, or go from 0 to 1, instead of replicating an existing model, or going from 1 to n. Once a novel idea has been launched, the goal is to monopolize quickly and eventually, ...