Friday Letter: Checking in on how GPs are handling due diligence

Imagine what you would say if six months ago someone told you that you would routinely make investments in companies entirely online, without ever meeting the founders in person or stepping foot in their office.

That sounds crazy. But it feels commonplace now. And it appears to be growing in numbers.

The covid-19 pandemic has upset many of our personal lives. And it has also jolted the way business is conducted. Anecdotally, it seems I am counting more firms that aren’t just considering virtual deals, but doing them in bulk.

I’m working on a couple of stories now about how venture firms are managing to get work accomplished in a virtual world. Whether they’re fundraising or deploying the capital, I’ve heard a lot of positives and negatives.

Even in the best of times, making decisions and conducting due diligence on potential investments is fraught with risk. But one local VC told me he didn’t think many of the Zoom investments being made would pan out. His point is that an entrepreneur-investor relationship requires a lot of trust and “developing trust is what happens in those moments when you’re not on Zoom, but are in the same room.”

I know a lot of deals coming through a network, either the firm’s network or a VC’s personal connections. But I’m hearing of more firms considering and vying for deals for entrepreneurs they never met and that didn’t come through any referral.

It’s an interesting way of doing business. And I was thinking this week when talking with GPs how the task of using Zoom or any videoconferencing platform puts emphasis on the gut instinct. I wonder just how good and confident VCs are to make an investment based on what they see on their computer screen.

Samir Kaji, senior managing director at First Republic Bank, tweeted something similar this week when he wrote: “Luck & skill both needed in early stage investing (over greater sample sizes, the latter becomes more apparent). I find that many grossly overestimate sourcing and underrate the art of picking when it comes to thinking about venture returns.”

Let me know what you think. Are virtual deals a temporary solution to the the lockdowns and social distancing? Or are they hear to stay in a post-pandemic world?

I would love to hear from you. You can reach me at agoldfisher@buyoutsinsider.com and I’m open to voice and video calls.