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Should entrepreneurs do due diligence on potential investors

on July 05, 2012

Even if it doesn’t feel this way sometimes, venture and angel investing is a two-way street. That means that it’s just as important for an entrepreneur to want to work with an investor as it is for an investor to want to work with an entrepreneur, says Rachel Sheinbein, a partner at San Francisco’s CMEA Capital.

She recommends that entrepreneurs who are moving beyond a first meeting with an investor use other CEOs who have worked with the investors as references, asking them to provide candid feedback on what it’s like to work with that investor. What are his strengths? How does he react when times get hard? Is he more helpful with strategy, operations or making connections?

Doing due diligence on investors is important because that relationship becomes a professional marriage and requires a certain amount of chemistry, Sheinbein says. Knowing about investors will also help startups build a diverse and well-rounded board.“Doing due diligence on the investor is almost as important as the due diligence that gets done from the venture investor into the startup,” she concludes.

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