DD isn't exactly cheap. And neither is partner time, that's probably a more precious resource than money at your average VC.
A failed DD says as much about the VC as it says about the company, it more often than not translates into 'VC didn't do their homework', and it can really eat into the '2' of the 2 and 20, those DD costs will come straight out of the operating capital of a fund. Especially for smaller VCs this can really hurt.
Thanks for the detail. To me, that sounds like the cost of doing business as a VC, more than risk. Forgive me if I have a little less empathy for the other side :)
Well, I see both sides. VC is not the money printing machine that many people make it out to be, lots of VCs work hard, take tremendous risk and in the end end up with relatively little to show for all their effort.
2% of the capital under management is a lot when a fund is large but when a fund is small (say 50M) it translates to 1M of operating capital for a year when all capital is invested. That's only the case at the end of the fund cycle, the time before then there will be on average only half of that available. If a full process DD (legal, commercial, technical, financial) costs $200K then even a single failure will substantially eat into the operating capital for that VC and may in fact harm their ability to do future deals.
Not having empathy for the other side is not very productive, either from the VC's point of view or from the point of view of the start-ups. I've seen more start-ups that try to play tricks than I have seen VC's (but I've seen both).
A failed DD says as much about the VC as it says about the company, it more often than not translates into 'VC didn't do their homework', and it can really eat into the '2' of the 2 and 20, those DD costs will come straight out of the operating capital of a fund. Especially for smaller VCs this can really hurt.