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What Due Diligence Are VCs Looking For and Will You Pass?

Sifted | Julius Bachmann | Feb 7, 2022

entrepreneurs pitching investors - What Due Diligence Are VCs Looking For and Will You Pass?

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If you’re a founder pitching to a VC, chances are that investors are going to do due diligence not just on your company, but you and your founding team too. We call this “founder diligence”.

In part one of this series I wrote about how this process is failing investors and founders. Too often, evaluation processes are built on personality tests and frameworks that don’t capture founders’ potential to develop.

Elena Pantazi, talent partner at Northzone, says the VC looks for six dimensions in a founder; while the first three are considered on a “more the merrier” scale, the latter three have to balance out advantages and risks.

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According to the firm, they look for founders with (1) a deep drive and personal motivation to be an entrepreneur, paired with (2) a growth mindset and openness for self-development. This in turn, enables them to (3) attract talented people around them when scaling the business. Similarly they view (4) having a healthy dose of self-confidence as a positive attribute that enables founders to go through the rough patches while staying humble. Finally, in terms of skill-sets, they (5) encourage founders to identify their own superpower and evolve into a thought partner across other business functions without (6) needing to exert too much control across all areas.

Digital+ Partners evaluates founders throughout a range of interactions, including the founder’s participation in deal meetings and pitches, and throughout the entire due diligence process. The assessments inform the investment decision, but also what support to provide post-investment, and are based on five dimensions: leading self, leading others, leading by results, leading as a founder and leading with knowledge.

“In the diligence process, I participate in most of the meetings and observe teams and individuals: how do they act? How do they respond to questions? How do they interact with each other? Sometimes, I also provoke and push founders on their answers, to see how they react,” she says.

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Entrepreneur First looks at five criteria in determining founder ability but emphasises that founders rarely score highly on all of these. These abilities also don’t necessarily have to have been demonstrated in work or study, but in hobbies, side projects or sports.

“We don’t believe past experience or knowledge is relevant to your future success. We don’t select or put in our first money based on ideas at all,” says founder Alice Bentinck. “What we are interested in is the behaviour and abilities that you have relative to your peer group.”

They are:

  • Challenges convention: individuals who have taken surprising paths or decisions or challenged the status quo, compared to their peers.
  • Drive to achieve: individuals with a bias to action, who are driven to build and create.
  • Followership: individuals who have had people follow their decisions and actions in the past and can unite people around a common goal.
  • Smart, with clarity of thought: individuals with problem-solving skills to tackle the macro and the micro. They can develop and communicate complex ideas to a range of stakeholders.
  • Technical knowledge, and applicability or commerciality: EF looks for technical knowledge from potential future chief technology officers (CTOs) and specifically, individuals with the ability to apply this knowledge to solve problems, or “applicability”. And with CEO candidates, EF looks for an understanding of technology as it can be applied across industries and how that relates to the customer, or their “commerciality”.

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NCFA Jan 2018 resize - What Due Diligence Are VCs Looking For and Will You Pass? The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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