As an investor, you do whatever you can to make sure that you never have that “oh, shit.” board meeting soon after you make a new investment. You know what I’m talking about — that meeting when you learn something you hadn’t realized before and say “Oh shit… did I really just make this investment?!”
Of course, no VC will admit to it, but after doing VC investment deals for over fifteen years, I will bet that almost everyone — admittedly myself included — has had as least one such moment. And I am pretty sure that some have had quite a few.
Thankfully, there are a few things you can do to avoid the dreaded “oh, shit” meeting.
The most important one is not to rush into a deal. Get to know the company really well, get to know the team really well, and seize every occasion to meet the team in multiple, different environments (formally at their office, at your own office , having a meal together or going to a hockey game). This is crucial because while the team might be on its best behaviours in formal settings, we often see true colours shine in more unfamiliar situations.
Diligence also obviously helps. Ask the team for a look at previous board minutes, meet with non-executive members of the team, speak to customers, speak to suppliers and other people surrounding the company — including ex-employees and ex-bosses. Look for red flags such as inconsistencies, and bad corporate culture — if something smells bad, it probably is bad.…
On the “technical side”, look carefully at cash, cash burn, cash reserves, assumptions in business plans, and know exactly what the burn looks like, whether the company has (or will have with your investment) the money to execute on its business plan. Keep a checklist of “must-haves” criteria and stick to it.
Make sure that management understands the “rules of engagement”. Every companies that works with us know that one simple rule applies: “There is no such thing as bad news”. The only bad news is when you (as the investor) are not told about something material or the full facts are not presented. Every growing company is going to have positive and negative events — those are just facts.
If you do your homework well, and if you penetrate yourself as a “part of the team”, there should be no surprise at your first meeting. If you don’t, it’s probably your own fault — you either misread the integrity of the team, its corporate culture, some obvious fact or did not spend enough time on the deal.