Limited Investor Due Diligence

Shaan Puri and Sam Parr share their candid perspective on the reality of startup investment due diligence, revealing that most investors, including themselves, do minimal verification of company claims and largely operate on trust.

Key Points:

• Current State of Due Diligence:

  • Most investors do "zero due diligence"
  • Primary verification methods are limited to:
    • Meeting the founder
    • Testing the product
    • Basic background checks (like previous work history)
    • Surface-level social proof (Twitter mentions, reviews)

• Verification Challenges:

  • Financial data is often just screenshots of Quickbooks
  • Metrics can be easily manipulated
  • Even when given access to data:
    • Definitions of metrics (like "active users") are unclear
    • Numbers are self-reported
    • Analytics can be faked (example: putting analytics code on someone else's website)

• Investment Decision Process:

  • Decisions often made within 10 minutes of meeting
  • Most rely on principle of "most people are good and don't lie"
  • Some investors sleep on decisions to avoid impulse investing
  • Very few do deep verification

• Notable Exceptions:

  • Some "angel" investors do thorough due diligence:
    • Ryan Hoover: Talks to customers, uses product, examines competitors
    • Ankur from Teachable: Known for doing proper diligence
  • Even thorough investors rarely audit financials or metrics

• Reality Check:

  • "100% of them could be lying to me and I would not know" - Shaan Puri
  • It's "very easy to get away with it for a while"
  • Most investors bank on others doing the real verification work