Due Diligence for Venture Capital Firms

We all do a little research before investing in a mutual fund, a stock, or even deciding where to have dinner. So, it should come as no surprise that any investor is going to do a “little research” and then some to ensure their investment is a solid one. For a venture capital firm, they have to be extremely involved in the due diligence of vetting investments since they have a large number of investors pooling resources together for the collective investment. 

Understanding the Company’s Unique Value Proposition

The obvious place to start is to thoroughly understand the company. This involves taking a deep dive into what the company does and who its market is. A close look at competitors is also done to understand the landscape and potential opportunities for growth. They want to know who you are, and what makes you special. 

Legal Due Diligence

VC firms then dot all the i’s and cross all the t’s in terms of licenses, agreements, contracts, and relationships. They like to have a clear understanding of all other prior investments and what terms are included in those investments and agreements. A look into any legal disputes by the company is done as well. 

Let’s Talk Numbers

Any VC firm will also want to know the numbers behind the business. Any investments, loans, and ownership details are put on the table. This is also the time to look at current profits, revenue opportunities, and losses may be disclosed. 

These Are My People

VC firms like to understand the culture of the team. They like to understand the org chart and who is who. They like to talk to any key figures within the company as well. Getting to know the passion behind the work comes out when you get to know the team! VC firms may also ask questions around staff policies, disciplinary measures, and plans for team growth. All of these help them understand the values and drive behind the product. 

Smart Focus

At Sentiero, we’re focused on doing work with companies with an emphasis on artificial intelligence. As a result, this narrows our focus on who we’ll work with and who we may refer to other sources. We engage our advisory board on each potential investment to help us understand how the technology fits into the 25 industries they know as well. While some VC firms invest in multiple industries and multiple verticals, it’s not uncommon to find other VC firms focus their approach as we have. It’s not just a passion project for us; it’s a vein of business and technology where we see amazing opportunity and growth. We’re excited to be part of that future. 

Before we make an investment in any of our companies, the Sentiero team does extensive research to vet the companies to fit our criteria. We’re looking at all aspects of the business from hard and fast numbers to the more subjective gut feelings around values and mission, as well as the technology solution in play. There’s no exact formula for what makes a perfect investment, but time spent upfront can make a big difference when it comes to a company’s growth and investors’ portfolios.