Market Cycles Shape Diligence

A discussion on how investment diligence practices shift between bull and bear markets, particularly in Silicon Valley and startup investing.

Bull Market Investment Practices

• Very little diligence at early stages
• Investment decisions driven by:
  • Deal heat/momentum ("it's a hot deal")
  • Social proof ("other big names are in")
  • Time pressure ("tight timelines")
  • Limited data sharing
• Investors forced to make blind bets
• Common practice to invest without thorough diligence

Bear Market Investment Practices

• Leverage shifts to investors' side
• Investors can:
  • Ask more questions
  • Dig deeper into company details
  • Take more time for evaluation
  • Request more comprehensive data

General Investment Environment

• Early stage investing requires some leap of faith

  • Good: Backing founders with track records before product exists
  • Good: Taking chances on promising visions
  • Bad: Occasional fraudulent cases slip through

• System generally works despite risks

  • Most founders exaggerate but don't outright lie
  • Some level of fraud is expected cost of doing business
  • Similar to credit card fraud (1% accepted loss rate)

Grey Areas in Startup Claims

• Distinction between:
  • "Fake it till you make it" optimistic forecasting
  • Actually misrepresenting facts
• Pre-launch companies harder to diligence
  • No customers or revenue to verify
  • Must evaluate vision and team instead