The Importance of Due Diligence

Scott Lenet – In 2003, my DFJ Frontier co-founder sourced an extremely compelling technology startup. This investment opportunity seemed amazing, and we were both excited.

The entrepreneur was one of the most charismatic salesmen we had ever met. When it came to vision, energy, and conviction, he had completely convinced us. We believed he would move mountains to achieve his vision.

We immediately began our due diligence process, which included all the normal requirements:

  • verifying that the company owned its intellectual property
  • reviewing material contracts
  • talking to channel partners and prospective customers
  • checking management references

Our goal was to assess the main risks of the startup: market risk, technology risk, financing risk, and people risk.

Diligence is useful in deciding how to manage an investor’s relationship with an entrepreneur, how to price the deal, and probably most importantly, whether to make the investment.

Because the company was new, we called board members from the CEO’s prior startup. Some of the references were provided by the CEO and some were “back channel” references who were friends of ours.

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