Falling in love with a founder’s pitch — but not doing due diligence — DOES NOT lead to better investment decisions.
In this post by Giselle Melo, you’ll learn about Matr’s due diligence framework.
At Matr Ventures, we’ve observed disconnects between founders and investors too many times. So, we believe founders and investors can benefit from learning how we make investment decisions at various stages of the investment lifecycle.
Get to know Matr’s Fund Advisors and where they fit within our due diligence framework.
OUR DUE DILIGENCE FRAMEWORK
This newsletter is the second in a three-part series covering our approach to:
- Selection Process
- DUE DILIGENCE FRAMEWORK
- Venture Fund Model
Venture capital investing is high risk. Conducting due diligence is part of how we manage that risk. It’s a process that addresses gaps and identifies red flags.
Falling in love with a founder’s pitch – but not doing due diligence – DOES NOT lead to better investment decisions.
By now, we’re all familiar with the story of Sam Bankman-Fried and FTX. I can’t help but wonder whether the venture capitalists, pensions, and endowments that invested in FTX could have taken a deeper look under the hood before investing.
One venture investor did conduct due diligence:
According to Business Insider, Sam Bankman-Fried pitched Chamath Palihapitiya’s VC firm, Social Capital, in 2021. As a result of their due diligence, Social Capital’s first recommendation was for FTX to install a board. "The person that worked [at FTX] called Social Capital back and literally said, 'Go fuck yourself,’" Palihapitiya recounted. Social Capital took the hint and didn’t invest.
But FTX hitting an apparent $26 billion valuation in early 2022, and having no independent board, didn't deter other herd-driven marquee investors from investing.
At Matr Ventures, we believe very strongly about the importance of due diligence. We believe this because we take seriously our responsibility to those investors who entrust us with their money.
In this newsletter, we deliberately use the term “fund manager” versus “venture capitalist” to highlight this responsibility.
Like most children of immigrants, I witnessed my parents work harder than anyone I know, after leaving everything behind to start over in a new country. My parents didn’t do it for social media likes. They did it because an improved economic future for my brother and me was their sole definition of success.
We invest on behalf of real people like you, and me, as well as institutions who represent the interests of people who have worked hard to ensure the well-being of their children and grandchildren.
Despite the exciting portrayal of venture capitalists in the media, we are not investing play money!
So, being a fund manager is not a monopoly game to me.
In my view, due diligence is a fiduciary duty of a fund manager. Our due diligence goal is to assess risk and confirm (or not!) everything the startup founder claims.
Venture capital is a high-risk investment because numbers, data, and audits can only tell part of the story about a startup’s potential success.
The strength of the founder, the product, and market trends play a significant part.
This is why I’m so bullish on investing in founders with a Mamba Mentality — if they can pass our due diligence process.
Demographics are undergoing a seismic shift, and the economy will grow in the hands of visionary, diverse founders. This is the moment to unlock one of our lifetime’s most significant investment opportunities: an untapped market on the cusp of being realized.
Though we’re a first-time fund manager, Matr is highly process and numbers-driven, and this is reflected in every step of our due diligence process:
1. Basic Screening (General Partner)
a. Can the founder describe the problem they want to solve clearly? Is it worth solving?
b. Do they have a viable solution?
c. Do they meet our other criteria: underestimated founders, traction, revenue, industry?
2. First Meeting and Second Meeting (General Partner + Fund Advisors as needed)
a. Does the business seem viable?
b. Preliminary scoring on the due diligence spreadsheet
c. Fill in significant gaps on the spreadsheet
d. Ask specific questions
3. Analysis (General Partner + Fund Advisors + PowerUp Advisors as needed)
a. Get answers to all due diligence items (data room)
b. Meetings as needed
c. Bring in Tech or Financial audit as needed
At the analysis stage, Matr comes across opportunities to identify and assess risk by reviewing client agreements, startup financials, compliance, user adoption and conversions, revenue, the technology, and other practical areas of the business.
Matr leverages its Fund Advisors, PowerUp Network and software company, NicheeStudio as needed throughout the due diligence process.
Founders take note: Our due diligence screening creates a high bar! Out of an average 120 firms we examine, we only fund one. 35 of every 100 founders will fail at the first stage of the process, 62 more will not pass the meetings stage, and only one of the remaining firms makes it past the analysis stage and qualifies for funding.
WARM INTROS & COLD APPROACHES
We encourage our networks to introduce us to founders, especially those they know well or those who they have done business with in the past.
Of course, warm intros are appreciated, but founders need not wait for a connection; they should feel free to apply directly
Either way, whether they come to our attention through warm introductions or direct cold calls, founders and their startups will face the rigor of our due diligence!
Sam Bankman-Fried need not apply.
This article is part of the Matr Ventures Newsletter. If you would like to subscribe, please sign up here.
