The Little Book of Venture Capital Investing: Empowering Economic Growth and Investment Portfolios

Chapter Eight

Investment Process—Due Diligence and Selection

An investment in knowledge pays the best interest.

—Benjamin Franklin

If the sourcing and screening portion of the investment process is likened to the initial thrill of a budding romance, this next part of the process is where the question gets asked, “Where are we going with this relationship?” Unlike romance, the ultimate goal is a liquidity event leading to an exit that causes all parties involved to feel as though their time and money has been put to good use. That “exit” could be in many different forms. The most satisfactory outcomes are usually in the form of an initial public offering (IPO) or, more likely, a merger or acquisition (M&A) with another company. Sometimes, the outcome may be a company recapitalization or another round of financing, either because of continued belief in the potential of the portfolio company or because of the need to bring in different parties with different skills or a fresher perspective. A buyout of interest on the secondary market can be a sign of the parties trying to salvage as much of the investment as they can before writing off the relationship as nonproductive, or may quite simply be a change in the LP’s allocation strategy, which forces the requirement of a sale.

LP Due Diligence of the VC

Due diligence is a term used to define the process of using a certain standard of care to discover as many relevant, objective facts about the person or persons with whom you are about ...