careful and persistent work or effort.
Middle English (in the sense ‘close attention, caution’): via Old French from Latin diligentia, from diligent- ‘assiduous’ (see diligent).
Diligence! It's the sort of word that commands respect. "Be diligent, children", says the kindergarten teacher to us. "Have you done your diligence?" says the trusted friend advising you on the job offer you just received. "Let's do some diligence on this" we investors say gravely to each other after hearing a very impressive entrepreneur pitch her business to us. "I'm gonna do some diligence on this guy," say the founders of a company to each other after meeting a potential investor.
"Diligentia" (in Latin): "close attention, caution, assiduousness, effort, care, rigor, perseverance.... " It's obviously not a matter to be trifled with, right? It also sounds like it should take a fair amount of time to "do well".
While diligence is certainly not a matter to be trifled with, it is a process that often requires some hacking. The startup world moves at high speeds and for better or worse, fundings these days can occur in the blink of an eye. So whatever side of the table you find yourself on, you need to be nimble and adjust to the pace. I can recall a venture fund whose partners I knew well some ten years ago. They would produce 50-100 page memorandums on each investment they were considering. This "analysis" would then be brought before their "committee" before a decision was made. Their diligence process was thorough, voluminous, assiduous, comprehensive..... and relatively worthless. I know this to be true, because that fund no longer exists today. They had no exits. In some ways you could say that they simply moved too slowly, or maybe it was the old "garbage in-garbage out" problem. Perhaps, but my view is that it was their wrong-headed view of what effective diligence is that was the real problem. Their 'diligence' was essentially "academic", contained deep analysis of the markets derived from "industry reports" and had little to do with the actual strength of the team they were considering backing (or the "ground truth" of the opportunity). More on what I mean by "ground-truth" below.
First, here are my current thoughts on "hacking diligence", (though I'd ask that you add your own views in the comments section below).
- Entrepreneurs checking out Investors: Don't waste time. This opaque world is now open. Your baseline is "are they for real or not?". After that, you want to know how helpful they are and what value they add. Go on AngelList and find their portfolio. If they don't have one, it's a yellow flag. Get warm intros to their portfolio CEOs, or ask the investor for emails of the CEOs they've backed. Speak to as many as possible. Boom. Now you know.
- Entrepreneurs checking out potential hires or Investors checking out Entrepreneurs: a) Where have they worked? Call people you know there or find friends who can intro you. b) Get to know them socially over time. Don't confine your interactions to a board room. I love Mark Suster's post on this subject: Lines not Dots, and I share it with my students every year. Lastly- draw your own conclusions and learn how to be good at this yourself.
- People looking to check out a startup they've applied to join: Get on the greatest tool no-one has ever heard of: https://www.linkedin.com/edu/ It's the tool within Linkedin that allows you to find out who at any given company or organization attended any of the same schools you did. Reach out to people early- even before you apply for the job, connect as "classmate" via Linkedin to folks at the company and invite them out to coffee. You'll get the real story on the company, its culture and dynamics and see if it's sounds like a good fit or not. Who knows, you may even have found a personal advocate.
- CoFounders: No real shortcuts here, (but hopefully I'm at least helping you avoid some problems). The best hack is knowing them for a long time. Work beside them for several months before deciding to partner. Don't guess. Know their character. Know what they are like in tough times. Among the companies I've backed, probably the biggest, unspoken competitive advantage I've seen has been the trust & loyalty of the founding team towards each other! Boom. Now you know.
- When you hear a true expert speak who is also very much "in the flow" of what's happening today, it's a rare and amazing thing to behold. When you want good advice, you need to talk to someone like this. Want an example? Listen to Stewart Alsop talk in this interview. His are deep insights. That is what wisdom is. He has the benefit of years of historical perspective and he is also plugged-in to the flow of what is actually happening today. He makes connections from what he has seen to what is going to happen. This is huge.
- When you find someone like this who is an absolute black-belt in their field and knows everything that's happened and that's happening- do whatever you can to stay in close touch! They are rarities. Not surprisingly, they give incredible advice and insight on people, companies, trends and markets.
- Most bad startup advice or diligence comes from a seeming plausible source. It's someone who knows "enough to be dangerous" and if you're inexperienced- you can't tell, and you give them the benefit of the doubt and you end up listening to them rather than listening to your own gut. One clue: They use the word "friend" too much. Really? How well do they know the people they are "friends" with. Dig deeper. Another clue: if they are not "in the flow" and are essentially on the sidelines pontificating about a certain technology or a market from a generalized, academic point of view- you are in dangerous territory.
- Keep in mind that you ultimately have to trust your own eyes. Take in all the inputs, but at the same time never lose your own sense of conviction and insight.
To put a finer point on both 'ground truth' and the 'limits of diligence', let me leave you with some questions to consider:
- How in the world can someone who doesn't know the founders understand what you know about them? Maybe you understand instinctively that even if the direction they're going in doesn't pan out they'll be able to figure it out somehow. Who else in the world could know that?
- Why do people (investors and others) cling to the fiction that before committing to invest, they have to have a good sense of what's going to happen with a particular team/company? Even in cases of success, they rarely, if ever, predicted how things were going to actually play out.
- How can anyone know anything about the real story of a team/company from a power point deck? If that is someone's sole "input", the "opinion" that emerges from their mouth can only be massively limited.
- Chris Dixon of a16z recently posted this line from Mike Moritz of Sequoia. It's a great quote to leave you with:
"I rarely think about big themes. This business is like bird spotting. I don’t try to pick out the flock. Each one is different and I try to find an interestingly complected bird in a flock rather than try to make an observation about an entire flock. For that reason, while other firms may avoid companies because they perceive a certain investment sector as being overplayed or already mature, Sequoia is careful not to redline neighborhoods."