Due Diligence Before the Evidence Exists

Private-equity diligence confirms an existing cash flow. Venture diligence must underwrite a business that is mostly in the future. It asks whether the team is exceptional and what it appears to be, whether the company can become very large, whether its traction is real, what could kill it, and whether its terms and capitalization are clean enough to finance it to an exit.

Venture diligence is lighter than buyout diligence. In the Gompers survey the average deal took about 83 days to close, with about 118 hours of diligence and about ten reference calls. Most portfolio companies fail regardless, so the marginal hour is usually better spent understanding the upside than eliminating every risk. The exceptions are fraud, broken legal foundations, and fatal technical flaws, which turn a power-law bet into a certain loss.