How can venture capitalists balance speed and thoroughness when evaluating investments?

Venture Capitalists are usually experienced people in their areas of domain and industries they focus on. So usually they are well-versed in the past, present, and future of the industry they focus on. This gives them the much-needed speed to dive to the micros of a specific deal- the levers and the drivers. This is where the thoroughness increases and these specifics are closely monitored to understand the key risks and drivers of growth thus balancing the speed and thoroughness.

Markets dictate the balance. In hot markets (2022), deals moved so quickly that diligence became uncomfortably minimal if you wanted to participate. Today where there are less available you have the relative luxury of diligence. At pre-seed/seed stage there are 4 questions precedent BEFORE the actual business plan. Different investors satisfy themselves differently. Do you trust the judgment and integrity of the founder? Do they have the personal strengths and characteristics that will let them raise financial capital? If yes, can they attract and RETAIN human capital. If those conditions are satisfied, do they have the strength/flexibility to execute an inevitably altered business plan? Then (and only then) think about the plan.

Venture Capitalists maintain a balance by employing streamlined initial screenings for speed and conducting comprehensive due diligence for thoroughness, ensuring a rigorous yet efficient evaluation process. By leveraging technology for quick assessments and allocating deeper analysis to the most promising opportunities, they optimize their investment decision-making.

Yes having a minimum checklist for any project to qualify is important. Also, ensure that the group/company looking for funding has all the documents needed, and a complete financial package before you start the review process. If the company's financial package doesn't meet the minimum criteria, cut it out right away. Hopefully, we can use AI to cut down on the time to review deals, especially if the client can fill out a form, and then have an AI algorithm qualify them and select only the top ones.

If VCs intend to achieve the top tier and be leaders rather than followers, they must be very well prepared in advance for the specific type of venture that is a high priority for their fund, which then enables them to quickly identify potential matches. When a good candidate match is identified, that's when the decision becomes challenging. Frankly, bias usually plays a big role (I was a VC for a decade in my own firm). All things considered, they will usually choose the venture closest to them physically and culturally, usually have a bias on age, university, and other factors. Whether realized or not (some are due to LPs or fund target), these biases often reduce perceived risk.

Having a strong deal flow pipeline is arguably the most important element in venture capital. Access to great deals is not something that happens overnight; it involves building a reputation and network with peer investors and startup founders. The key to establishing a robust network is providing value to others. If you are interested in receiving referrals from founders, go above and beyond in supporting your portfolio companies. For referrals from other investors, send deals their way that may be relevant to them. Be active and supportive of the ecosystem, and you will be rewarded with early access to great deals.

Build your network and relationships early especially in countries where relationships take a longer time to be established. It should be a constant effort. Once firm partnerships are present and there’s mutual trust, workload on DD and deal sourcing will naturally be reduced as partners leverage on each other to do deals.

As Yotam mentioned, if your company name is not YC, Sequoia, 500 et al, the brightest and best startups are not going to beat a path to your door. Giving back by mentoring at several startup accelerators and as an investor, being invited to attend their demo days, is a good way to start seeing dealflow and being seen. I still think you have to add one component and that is to build up a reputation around being known for one thing. What do I mean. Maybe it's being the Sultan or Sultanah of SaaS, or the Go-To-Market Guru. Being known as an expert in a field/vertical still counts.

The best deals will come from your network. Not just because they already know you and your expectations. But also because people have already done basic due diligence before presenting it to you. If someone present you a deal, they also engage their credibility. This is self-filtering. You will not pay much attention to someone who present you the 6th low quality opportunity in a row, effectively pushing them to the outer rim of your network. If you want more opportunities, you also need to share good opportunities yourself, to build good karma.

The main questions, especially for early stage, gravitate around business plan and its paid validation. It also encompass a validation of the team skills and character. After which, you will go in the details of the product, the customers, the markets in an order that depend on the specific of the case. More than questions, you should also seek external validation of the team and product, ideally from your network, and potentially from market studies.

You can't diligence a start up so testing commercial assumptions underpinning revenue growth model is absolutely key. This need to be done by an objective third party otherwise you will find what you want to find!

As a VC, trust your gut but double check-fast decisions pay off with the right due diligence. Follow your intuition but verify the important details to avoid missed opportunities or speedy regrets.

The best validation tool is paid customers. If nobody pay for a product solving an issue, then you need to confirm if that really is an issue, or if it is a big enough issue that people are willing to pay to solve. Studies, interviews, tests and such have advantages, but the glaring issue that the intents of the customers are not validated with a ressource commitment from them (money out of their pocket). That should be the real decider.

Learning from your mistakes so that you improve your post investment performance on the next investments you make is essential, and yet not easy to implement in practice. There is a substantial time lag between deploying an initial investment, and normally one or more follow on investments, and being able to "measure" uplift in individual startup valuations, or the fund as a whole. There are no substitutes for humility, self reflection and having team members and advisors with whom the level of two-way trust is high enough for them to be able to give you unfiltered observations and advice.

Trust the process but maintain flexibility. Promising ideas can evolve in new directions, so stay open-minded while guiding portfolio companies towards success with patience and support through inevitable pivots.

Thesis drive venture investors form the key market insights, distribution partnerships and customer relationships prior to engaging in particular deals. These investors hold initial hypotheses on what conditions define market category leadership so their process will drive at a faster timeline than other investors.

You'd be surprised how many VC investors have not documented their deal flow management and due diligence processes. Instead, they evaluate prospective investments using a mental checklist and notes scattered across their CRM, inbox, and Slack. Having a documented, repeatable process that includes comprehensive checklists that are priority ranked allows VC fund managers to move quickly but not compromise high-priority or critical due diligence.