Bubble In Venture Capital Has Investors Skimping On Due Diligence

Things are great right now for venture capitalists. What with the impressive valuations and mega-rounds. But in these good times, are eager overloaded investors cutting corners and skimping on due diligence?

“There’s a lot of exhaustion, for sure,” said Eric Bahn, co-founder of seed investment firm Hustle Fund. “It just feels unsustainable.”

It’s been busy.

More than 8,000 VC deals were completed in the U.S. in the first half of the year, representing a whopping $150 billion invested, The Information reported. That’s nearly equal to the total capital raised in all of 2020, according to financial data firm PitchBook.

But with the flurry of activity comes the “intense pressure to not only win deals but ink them as quickly as possible.”

Summer is typically slow for investments, but for the second consecutive year, many venture capitalists said work didn’t ease up in the summer.

“It’s an area people don’t like to talk about,” Bahn said of this exhausting period in the VC community. “I’ve been in conversation with peers [who] are in tears…because they are losing and they feel like losers themselves.”

Because of the work overload, there is a rush to do deals quickly, said investors and lawyers, and due diligence, a necessary part of the investing process, is happening.

Normally, venture capitalists carefully examine with the help of their lawyers and accountants a startups’ business performance and the background of their leaders. “It’s a core part of the investment process that helps protect venture capitalists from investing in bad actors, as well as providing a better understanding of the companies’ strengths and weaknesses,” The Information reported.

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Now investors are cutting corners on diligence in order to be first on a deal. This is a risky proposition.

According to Jon O’Connell, a partner at law firm Crowell & Moring, VC and startup lawyers simply don’t have enough time to conduct the diligence necessary to issue a legal opinion for every deal they work on.

“Law firms are really busy,” said O’Connell. “It’s becoming harder for certain law firms to go through a diligence exercise and get to a position where they can give an opinion, given the workload those attorneys face.”

Credit:nadia_bormotova/ isotk 

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