Venture Capitalists Talk About the Importance of Due Diligence

February 27, 2017

2:20 pm

Within a tech ecosystem, local investors are on alert to find the hottest startup and latest innovation where they can place their money and hopefully strike gold.

Phoenix Startup Week and Chase for Business hosted a venture capital panel with seasoned and active investors in the Arizona community who offered their advice to budding entrepreneurs. The panel included Jim Goulka, managing director at Arizona Tech Investors, Nathan Mortensen, principal at Tallwave Capital, and Romi Dhillon, founder of Arizona Founders Fund.

The panel agreed that for a community to have an active investor ecosystem, it should have: the people behind the capital to connect and know each other, a tradition and legacy of founders who reinvest in the community, and founders who try to nurture a high quality of knowledge transfer.

The discussion was an open flow of questions from founders and insight from investors about what they look for in a deal, their due diligence process and why they pass on a company. Here are a few key points:

Important to Know the Founding Team

All investors agreed that one of the top things they evaluate in a startup is the team, specifically their background, expertise and scrappiness.

“We need to get comfortable with [a few things]: the founding team and trust that they will be good stewards of the fund, that you have something of value and adds value to a customer base, and that you have an opportunity, at some point, to make money with your business by selling it,” Mortensen said.

They also look for passion and ability for the team to execute on their mission.

“My favorite founders are teams of three. Two of them are developers. I like to know exactly what I’m investing in. Developers passionate about their product and working for their entity is more capital efficient,” Dhillon said.

(Left to Right) Jim Goulka, Nathan Mortensen, Romi Dhillon

Due Diligence Takes Longer Than You Think

Anytime startups are in the process of raising money with investors, it never goes as fast as they want. The panelists were adamant that the due diligence process, however long it takes, is necessary to protect their investment since they are taking the bulk of the risk.

“The due diligence process falls into a schedule and when a founder says they need the money in two weeks, it doesn’t mean that we don’t believe in you or we’re not interested, it means that we have other deals going on. Founders need to be realistic in their timeline and should have reached out to us earlier. I encourage founders to be on point and [manage] your schedule,” Dhillon said.

All investors agreed, at the core, the due diligence process helps to eliminate the possibility of losing their investment.

“We are investors, we’re looking for returns and we choose to invest in startups which means we are willing to take more risk. The idea might be brand new that no one has done before, but we have to make judgements recognizing there is a significant possibility that we will lose all of our money,” Goulka said.

We’re Passing And Here’s Why

When an investor group passes on a startup, some reasons may include a wrong fit, little traction, too early to invest, too much risk, or team makeup, among others. If they do pass on a startup, they might suggest another group in town that might be a better fit and to take them up on that introduction.

At the end of the day, investors need reduce their risk, increase ROI and find a pot of gold now and again to reinvest back into the community.

“Investing is a high-risk business. We are looking for the companies with a potential to be good on a global market,” Goulka said.

Read more about raising capital and Phoenix Startup Week at Tech.Co

chase for businessThis article is part of a Startup Week content series brought to you by CHASE for BUSINESS. Startup Week is celebration of entrepreneurs in cities around the globe. CHASE for BUSINESS is everything a business needs in one place, from expert advice to valuable products and services. Find business news, stories, insights and expert tips all in one place at Chase.com/forbusiness. Read the rest of our Startup Week series.

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Tishin is a technology journalist and correspondent. She has written for TechCrunch, Demand Studios and Fitness, and has regular network segments on local Phoenix affiliate stations. She holds a Master's degree in Clinical and Sport psychology, and has covered many areas of technology ranging from 3D printing and game development to neurotech and funding for over 15 years.

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