The quality of due diligence is demonstrated, not declared.
Editorial written by Ionuț Pătrăhău, Managing Partner & Corporate Development @ SeedBlink. In addition to his vast experience in banking, Ionuț Pătrăhău also worked in the medical services field, being former CEO of the private health network Regina Maria and co-founder of the Brain Institute, a neurosurgery center developed in partnership with the Monza Hospital.
In most cases, the distinction between investment platforms is based on the involvement of management in the due diligence process of the startups offered to investors. In principle, it is easy to say that the platform conducts a rigorous due diligence process to make investors feel that their money is safe if there is "someone", an authorized person, who verifies the legitimacy and honesty of the data provided by the startup.
Well, that is not the case. In order to say that the platform is doing due diligence on the startups that go public, the following situations should occur simultaneously:
(1) a team of lawyers confirming the authenticity of the startup's legal documents. This team can be external - a situation in which any legal due diligence is very expensive - or internal, a situation in which a lot of experience and a lot of professionalism is required so that the due diligence routine is respected and investors can rely on it.
(2) It requires a financial team that validates the situations offered by the startups and accepts the financial projections they present, which are usually extremely optimistic, given the problems that may arise along the way, challenges that the startups usually cannot even imagine.
(3) Last but not least, an experienced business team is needed that can deal with a variety of industries and address issues that were not mentioned in the presentations.
In our opinion, this last component is by far the most important, because without the alignment of the first two chapters, the entire due diligence process will stall and no longer make sense.
SeedBlink has resorted to several defenses: First, the vast majority of startups launching campaigns are co-funded by venture capital funds. In any case, they have seized it, despite obstacles we can hardly imagine.
The second line of defense is to double the commercial due diligence of their own personal evaluation, which in most cases, regardless of the outcome of the preliminary legal and financial evaluation, can be a "stop" in the path of this campaign. if the founders are not convincing or if they have difficulty explaining their case to our investors at first sight.
So the due diligence process is by no means a joke and certainly not a reason to mislead investors.
It should also be emphasized that a rigorous and professional due diligence process is not a guarantee of the startup's subsequent performance, but confirms the authenticity of the data at hand.
Investing in startups still involves a high degree of risk. Therefore, it is necessary to formulate an investment thesis and build a diversified and balanced portfolio. Looking back at the end of the Theranos - Elizabeth Holmes process, the motto "fake it until you make it" is unacceptable, regardless of the illustrious name on the board and regardless of the well-known names that funded the startup with hundreds of millions of dollars. The secrecy, lack of transparency, and temptation to equate the founder with other personalities in today's world not only discredit the startup and its theoretical achievement but also cast a large shadow of doubt on the reality behind the curtain.
We take the Theranos phenomenon as a valuable lesson and frame it to remind us of the risks of fraud recognized too late. Ultimately, we find that due diligence plays a role as a differentiator between venture capitalists, but ultimately the confidence that founders inspire with their transparency and enthusiasm, the detailed analysis of their backgrounds, and past experiences play an important role in accepting one startup or another.
There will always be a combination of the personal experience of the committee members and the rigorous analysis of the professionals that will lead to the optimization of a comprehensive due diligence process. And remember, the quality of due diligence is demonstrated, not declared.
SeedBlink is a full-service investment platform that enables everyday and accredited investors to access curated European tech startups through crowdinvesting and angel syndicates.
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By Ionut Patrahau
PublishedJanuary 20, 2022
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