[rossjudson]

I've always had this background thought that it would be a fun job to do "due diligence" on behalf of VCs. I remember being on the receiving end of some of that work, and I wasn't all that impressed.

Do today's VCs take technical due diligence seriously? If not, why not?

[makestuff]

I think the issue is in the last few years hot startups would just say sorry we are going with another firm. There was so much money flying around it was similar to home buyers buying houses with all cash offers and waiving inspections.

[SV_BubbleTime]

Another positive of the free money era on pause.

[orangepurple]

ZIRP is the technical term

[gizmo]

VCs don't invest their own money. VCs are paid a percentage of the money they invest in startups. As a result VCs only care about the quality of the investment they make insofar it helps them raise more money in the future. Because more money = more fees.

VCs care about technology sometimes, but not always. If a startup doesn't grow because their tech is bad that's something VCs care a lot about. If a startup grows fast with snake oil tech (e.g. crypto, theranos, wework) VCs will happily throw more money at them.

[DonsDiscountGas]

My understanding is that VCs with healthcare experience didn't invest in Theranos. Holmes' family was well connected, and they invested in a family friend.

[gfdsgfsdgfs]

This is not true. VC general partners do invest their own money.

[fakedang]

Yeah,like sub-5% of the fund size.

[afavour]

> Do today's VCs take technical due diligence seriously? If not, why not?

Because they're worried they'll miss the boat. Maybe less true in these not-quite-so-booming economic times but not so long ago VCs were literally competing to get in on rounds of funding for hyped up startups. The fact that the hype often never amounted to anything didn't seem to matter, if so-and-so was investing then you wanted to be in on that too or you'll look bad.

[nickstinemates]

VCs have technical people they go to for advice. I have served in such a capacity a number of times. Good to trade in favors.

[rvba]

Technical due dilligence isnt that important.

The first thing is that the product has to scale, be popular, then maybe make money. You can always hire people who will rewrite.

The opposite doesnt work. Technically brilliant product might be unpopular or unknown.

Please note: I dont say that things should be built poorly.

[raverbashing]

> Technical due dilligence isnt that important.

I suspect some Theranos and uBeam investors disagree with you

[sroussey]

Very much depends on the market. A marketplace app establishing a great user base? What will the intrusive technical due diligence get you?

Very much depends on the stage. At Idea Stage or Prototype what are you looking at exactly?

Series C biotech though…

[CharlieDigital]

In many cases, there's a fine line between "technical" DD and just "DD".

Case in point is the JPMC acquisition of Frank and Frank's CEO Charlie Javice.

Turns out all of the user numbers were made up. A technical DD would have easily surfaced this even though the user numbers and volume is business related.

[x0x0]

For the enterprise saas business we built, vc duedil was talking to customers, both directly via our introductions and backchanneled via their network.

For the technical aspects, our vcs didn't / don't care. That's our job to figure out, and if we don't, they fire founders.

I'm honestly not sure how you would seriously audit chat app numbers, and I suspect and hope Abraham Shafi is going to prison. For most businesses, if you have to seriously audit things like that, you probably shouldn't be investing. A company inflating their numbers by 20x will be pretty hard to detect, and our safeguard as an industry is that's fraud, and people go to prison for committing fraud.

[CharlieDigital]

It's not that hard.

    - Look at the application logs
    - Look at the emails and reach out to a sub-sample of them to determine if they are real users
    - Look at the network traffic/volume numbers
    - Look at the architecture to see if it could actually support that volume
    - Look at the pattern of content in a random sampling to see if it's just "Lorem Ipsum" or actual, real content

Just some heuristics I'd use off the top of my head. I've had to do some technical DD in the past and there are always ways of determining legitimacy of claims.

The consequence of not doing even basic DD are outcomes like the $174m fraud that JPMC eventually discovered: https://www.theverge.com/2023/4/5/23671000/jpmorgan-frank-fr...

[blueboo]

They do but it’s a matter of time constraints. Pace. Deal flow. Take too long to scrutinise a good thing and it’ll be snapped up from under you. The group that poached might have even less time to do proper due diligence. VCs tap expertise for due diligence in all sorts of mostly-informal ways. But for proper, compensated investigations there’s almost never enough time to build a case you’d stake your reputation on

[FormerBandmate]

Tiger Global and SoftBank made tons of money by doing zero due diligence in 2020. It inexplicably became a phenomenon

[pintxo]

Same here, I had some of the most fun checking out potential investors in my last company. I'd certainly enjoy also checking Startups, but really just any sort of tech-related due-diligence would be awesome.

Now, how to make a business out of that?