Doing Diligence Well in Venture Investing: Going back to the future

Key Report Findings:

After the “frothy funding party” of 2021, due diligence in venture investing has made a comeback.

• What happened to due diligence: The report takes us through how due diligence has changed over the past 8 years, with the rise of mega-funds and the zero interest-rate (ZIRP) era. VCs began prioritizing speed and cutting corners on diligence, only to find – after interest rates rose and capital contracted – valuations falling in a reversion to the norm.
• The art and science of due diligence: While a checklist can be useful, the “art” of due diligence is about homing in on the key issues involved in assessing the upside and downside of the opportunity. On the other side, while diligence for venture deals can involve a lot of document-gathering, it doesn’t have to be a painful “homework” process for founders.
• How CVC diligence is a little different: In addition to the standard diligence items, CVCs will spend more time validating areas of strategic overlap between the startup and the CVC’s corporate parent. CVCs, even at an early stage of the investment process, are often considering how they might start working together with a startup.
• 2024 could be one of the power-law vintages: Unlike the 2021 vintage, which is unlikely to see outsized outcomes, 2024 could be one of the “power-law vintages” that drive the preponderance of returns – assuming that investors learn their lesson on diligence. It’s no wonder that diligence is “the new black.”

Navigating the Storm

The report puts the spotlight onto high-quality due diligence, which has returned after the tumultuous investing environment of the past two years. Venture investors are now rebuilding their muscle memory of how to do diligence well. 

The intent of due diligence is to thoroughly evaluate an investment opportunity and develop a high-conviction investment thesis. For CVCs, their strategic motivations have helped them maintain their diligence capabilities and ability to partner with founders.

This report series aims to provide value to investors and founders during challenging times. Future reports from TDK Ventures and 6Pages will delve into topics such as strategies for entrepreneurs to extract more value from their relationships with CVC investors, and insights into how CVCs should be organized.