Due Diligence

Ben Gilbert (0:00)

Hello, Limited Partners, and welcome to Seattle, David.

David Rosenthal (0:04)

Yeah, it's great to be here. First time in the fully converted home podcast studio.

Ben Gilbert (0:10)

The Wave Capital North slash Gilbert abode.

David Rosenthal (0:14)

It's looking really good.

Ben Gilbert (0:17)

There's a lot of sound dampening happening in here.

David Rosenthal (0:19)

You should up your listing price on Airbnb with this in here.

Ben Gilbert (0:21)

Yeah, no kidding.

I don't know if that would play well or not well if it was like, stay at this Airbnb, also a podcasting studio. I suppose you'd actually probably would be really nice if you were looking to do a podcast on the road.

David Rosenthal (0:36)

Well, having we have acquired, have traveled to our guests and look for a podcast studio if we could find an Airbnb that also has a studio.

Ben Gilbert (0:44)

This could be the Impact Hub Santa Barbara of the North.

All right, limited partners. Today, we are talking due diligence and specifically about sort of what's normal in a fundraise for a firm to ask for. What's the sort of reasonable amount of probing to do? And the reason we thought this episode would be particularly helpful or particularly sort of actionable is it's really easy when you're a startup that has limited time to let investors drag on and on and on and on because they're not frequently on a timeframe until it's a competitive deal or something.

David Rosenthal (1:19)

And you also, especially in the early stages, don't really know what's normal.

You only do this a limited number of times. We should be clear, too. We're talking about due diligence for a venture capital financing round, which is very different than due diligence for, say, an acquisition or another type of transaction.

Ben Gilbert (1:36)

Yep. We will talk about sort of the due diligence at different stages, you know, starting here with Seed and then working later and later. The TLDR on that is that a lot of the sort of legal, technical accounting stuff becomes more and more important the further you get, but we will get into that. Getting back to really the mission here is sort of trying to get more information out there about what you can expect, what's reasonable, and frankly, like, to prepare entrepreneurs for diligence as a time-consuming process, but, you know, something that long term, everybody around the table and being involved in the company feeling like you all sort of know the good, the bad, and the ugly together ends up being hugely value-created for everyone, and so I think the right amount of diligence is a great thing for a company, frankly, whether there's investment or not.

Thank you to limited partner Scott Elchison for suggesting this in the Slack. I think David and I had some ideas for what we wanted to do on this LP show, but Scott, when you sort of wrote this up, it just hit me like a ton of bricks that we should definitely do a show on this, and let's do it this time.

David Rosenthal (2:44)

Should we dive in?

Ben Gilbert (2:44)

Let's do it.

David Rosenthal (2:45)

Okay. So there basically are two types of diligence. The word diligence, quote, unquote, when you're in a fundraising process, a venture fundraising process as a company, means two separate things.

You can be in diligence, quote, unquote, with a firm or multiple firms in the pre-term sheet phase, where it's still the courting process on both sides. And then there's also the diligence process, the very much more technical due diligence process that happens after a term sheet is signed, and that is mostly done by lawyers and accountants and the like. We're going to cover both on this episode, but first we're going to talk about the primarily business diligence, it's quote, unquote, called, but the mutual courting process of a firm and a startup deciding that they want to get engaged with the term sheet.

Ben Gilbert (3:34)

Yeah, and in the outline here that we're going to go through, we talk a lot more about the diligence that the firm will do on a company, but I think it's important also to think about what's the diligence that a company should be doing on a firm as well. And we'll touch on both of those.

David Rosenthal (3:48)

Absolutely.

Starting with what a venture capital firm will do when they are looking at a company, and more at the early stage, but at all stages, it really starts with the team, and on the team it starts with the founders. We've talked about a bunch on Acquired, both on the main show and the LP show. It's a personal relationship that you're entering to when you take venture capital investment from a firm, and in many cases, that partner at that venture capital firm is going to sit on your board, you're going to work closely with them for a long time, and then with you, the personal aspect of this is kind of first and foremost, and that just comes from spending time together.