I Spy a Secret

Got a skeleton in your closet? Bring it out before seeking VC.
Magazine Contributor
2 min read

This story appears in the September 2007 issue of Entrepreneur. Subscribe »

Planning to seek venture capital? Be forewarned: Before VCs invest in you, they'll probably investigate you.

VC firms performing due diligence on companies they are considering funding isn't new, but there's been an influx of new entrepreneurs approaching VCs--who do not know them--with blind pitches. VCs are trying to size up both their financials and their character. "The lion's share of [VCs'] due diligence is conducted on the people themselves," says Angelo Santinelli, business professor at Babson College and a former VC.

VCs hire third parties to do the digging for them. Corporate Resolutions is a 22-employee business investigations and consulting firm that can churn out a 15- to 60-page report within days for its VC clients. Ken Springer, the company's founder and a former FBI special agent, says the two biggest problems for entrepreneurs are not being forthcoming with information and having a hidden pattern of lawsuits. "Many times, there are sensitive personal issues," says Springer, "someone who's gone through an ugly divorce or something."

Santinelli says he never saw entrepreneurs knowingly misrepresent themselves when he was a VC, but he did see them leave companies off their resumes and fail to disclose certain relationships. In one case, two members of a startup team that pitched his VC firm didn't reveal that they were married, a detail that came out during the VC firm's own due diligence. "Was it a big deal? Yes. It goes to character," he says. Springer believes the key is to get everything on the table--a DUI, a messy divorce, a bankruptcy, whatever--before the VC firm inevitably finds out on its own.

Now entrepreneurs are giving VCs a taste of their own medicine at sites like TheFunded.com, where they can post the lowdown on their interactions with VCs. In these days of instant information, due diligence is a two-way street.

More from Entrepreneur

Dustin's experience and expertise can help you monetize your message, build a marketing strategy and connect with influencers.
Book Your Session

In as little as seven months, the Entrepreneur Authors program will turn your ideas and expertise into a professionally presented book.
Apply Now

Are paying too much for business insurance? Do you have critical gaps in your coverage? Trust Entrepreneur to help you find out.
Get Your Quote Now

Latest on Entrepreneur

My Queue

There are no Videos in your queue.

Click on the Add to next to any video to save to your queue.

There are no Articles in your queue.

Click on the Add to next to any article to save to your queue.

There are no Podcasts in your queue.

Click on the Add to next to any podcast episode to save to your queue.

You're not following any authors.

Click the Follow button on any author page to keep up with the latest content from your favorite authors.