The Importance of Founder Due Diligence: A Deep Dive into Our Process and Its Value

At Verb Ventures, we believe that the cornerstone of successful investments lies in understanding the people behind the companies we invest in. As I’ve mentioned in a number of previous articles, at early stage, I’d rather have a fantastic founder with an average product than the other way round. This is where our unique Founder Due Diligence (DD) comes into play. We do not simply conduct background checks and look for references, we have our own proprietary questionnaires and assessments that founders are required to complete. Founder DD is not just a box-ticking exercise for us; it is a meticulous, thorough, and enlightening process that shapes our decision-making and supports our portfolio companies’ long-term success. It is not for binary investment decision making, it provides us with information that can be used for the short, medium and long-term in managing our portfolio.

In this article, we will delve into why founder DD is crucial, how we conduct it, and the immense value it brings to our investment strategy and the startups we back.

Understanding the Importance of Founder Due Diligence

The journey of a startup is fraught with challenges, uncertainties, and pivotal moments that define its trajectory. Amidst this journey, the founders play a critical role. Their vision, resilience, decision-making, and leadership significantly influence the startup’s success. While a ground-breaking idea and a large market are essential, the capability of the founder to execute the vision, adapt to changes, and navigate crises is paramount. This is why we place a strong emphasis on founder DD and why we have our own proprietary process.

Founder DD helps us:

1. Make Informed Investment Decisions: By understanding the founder’s mindset, values, and approach, we can better predict the startup’s potential success.
2. Hold Founders Accountable: Documenting the founder’s stated priorities and approaches allows us to hold them accountable and ensure alignment with their vision.
3. Provide Targeted Support: Knowing the strengths and weaknesses of founders enables us to offer more precise and effective support.
4. Build Strong Relationships: A deep understanding fosters trust and mutual respect, which are crucial for long-term partnerships.

What Our Due Diligence is Based On

Our DD process is built on a solid foundation of experience, psychological studies, and advanced technologies. Here’s a closer look at what informs our DD methodology:

1. My Experience as a Head-Hunter: For just under a decade, I worked as a head-hunter, building some of the most exciting businesses across Europe within the private equity and venture eco-system. This role involved identifying talent, understanding team dynamics, and assessing cultural fit. The skills and insights gained from this experience are invaluable in our DD process. I developed a set of guidelines and questions to get to the crux of what motivates individuals and whether they are a good fit for specific environments through my experience of interviewing thousands of candidates. These guidelines form the backbone of our DD process.

2. Psychological Studies and Testing Methodologies: We have incorporated principles from various psychological studies and testing methodologies to enhance our DD process. Understanding personality traits, cognitive abilities, and emotional intelligence helps us gauge a founder’s potential to lead, adapt, and thrive in high-pressure environments. Tools such as the Big Five personality traits, Myers-Briggs Type Indicator (MBTI), and emotional intelligence assessments provide a structured approach to evaluating founders.

3. Artificial Intelligence: Leveraging AI allows us to analyse large volumes of data quickly and accurately. AI helps us identify patterns and insights that might not be immediately apparent. For instance, we use AI to analyse responses to our questionnaires, identifying nuances and inconsistencies that could indicate potential red flags or areas of strength. This technological edge ensures our DD process is both comprehensive and efficient.

Our Due Diligence Process

Our DD process is multifaceted, combining quantitative and qualitative assessments to provide a holistic view of the founder. All of our assessments have scoring systems in the back-end that are based on our own thesis and beliefs about potentially successful founders. Here’s a breakdown of the key components:

1. Assessing Priorities

We start by understanding the founder’s priorities. This involves a detailed questionnaire where founders rank various business focus areas, from customer acquisition to team building. This helps us gauge their strategic focus and identify potential areas of misalignment.

Example Question: “Rank the following business focus areas in order of importance: A) Customer Acquisition B) Product Development C) Brand Building D) Team Building”

The responses to these questions give us insight into the founder’s strategic thinking and areas they prioritize. It also allows us to hold them accountable in the future. If a founder claims that team building is their top priority but later neglects it, we can address this discrepancy and offer guidance or our support.

2. Evaluating Decision-Making Processes

Decision-making is a critical skill for any founder. Our multiple-choice questionnaire covers various business scenarios to understand how founders make decisions. We look at their approach to budget constraints, hiring, market trends, and more.

Example Question: “When facing a budget constraint, what is your first step? A) Cut down on marketing and advertising expenses B) Prioritize essential functions and seek cost-effective alternatives C) Reduce workforce to maintain essential operations D) Seek additional funding or loans”

These questions help us understand their strategic priorities, risk tolerance, and problem-solving abilities. The answers reveal much about their ability to balance short-term needs with long-term goals and their capacity for innovative thinking under pressure.

3. Crisis Management

Crisis management skills are indispensable for startup founders. Our crisis management questionnaire presents challenging scenarios, such as discovering a product flaw post-launch or facing sudden regulatory changes. Founders’ responses to these situations help us assess their resilience, adaptability, and leadership under pressure.

Example Question: “Severe Product Flaw Discovered Post-Launch: A) Quietly fix the flaw in future iterations B) Announce the flaw and recall C) Offer discounts to dissatisfied customers D) Shift focus to new features”

By analysing their choices, we can evaluate how proactive and transparent a founder is, their ability to handle negative publicity, and their commitment to quality and customer satisfaction.

The Value of Founder Due Diligence

1. Enhanced Decision-Making

Founder DD equips us with the knowledge to make informed investment decisions. By understanding a founder’s mindset, values, and approach, we can better assess the potential success of their startup. This reduces the risk of investing in companies that may have a great product but lack the leadership to drive it forward.

2. Accountability and Alignment

Documenting the founder’s stated priorities and approaches allows us to hold them accountable. If a founder deviates significantly from their stated path without a valid reason, it raises concerns. Conversely, if they stay true to their commitments, it builds trust and confidence. This accountability ensures that the founder remains aligned with their vision and our expectations.

3. Targeted Support

Understanding the strengths and weaknesses of founders enables us to provide more precise support. For example, if a founder struggles with crisis management, we can connect them with mentors or resources to strengthen this area. If team building is their top priority, we can offer advice and tools to help them attract and retain top talent. This tailored support increases the chances of the startup’s success.

4. Building Strong Relationships

Founder DD fosters stronger relationships between us and the founders. It shows that we are genuinely interested in understanding them as individuals, not just as business entities. This builds mutual respect and trust, which are crucial for a successful long-term partnership.

Practical Application:

Our Founder DD provides us with the ability to identify shortfalls in skills, areas to focus on, or areas of strengths that can influence our management and support strategies for working with founders. It is not just a tool for binary decision making.

Case Study 1: Addressing a Shortfall in Financial Acumen

Scenario: During the DD process for a B2B marketplace startup connecting suppliers and retailers, we might discover that the founder has an impressive technical background and a clear vision for the platform but lacks financial acumen. The founder might admit during interviews that while they understand the importance of financial management, they have never handled the financial aspects of a business at this scale.

Findings:

• Shortfall in Skills: Limited experience in financial planning and management.
• Areas to Focus On: Strengthening financial oversight, budgeting, and cash flow management.
• Strengths: Strong technical expertise, innovative thinking, and a solid product roadmap.

Impact and Management: Recognizing this gap, we could take several steps to ensure the founder can effectively manage the company’s financial health:

1. Mentorship and Advisory: We could connect the founder with a seasoned CFO from our network who would provide ongoing mentorship and help develop robust financial strategies tailored to the B2B marketplace model.
2. Hiring Support: We might assist in hiring a financial director with extensive experience in scaling B2B platforms, ensuring that the company has the necessary financial oversight.
3. Financial Training: We could facilitate financial management workshops for the founder, equipping them with essential skills to understand and monitor financial performance, specifically within the context of a marketplace.

By addressing the financial skills shortfall, we would ensure the founder can make informed decisions, secure additional funding, and manage the company’s growth sustainably. This proactive approach would also strengthen our relationship with the founder, building trust and demonstrating our commitment to their success.

Case Study 2: Enhancing Leadership and Team Building

Scenario: A promising B2B SaaS platform aimed at automating procurement processes might have a visionary founder with a strong background in procurement technology but face challenges in team leadership and building a cohesive company culture. The DD process might reveal that the founder struggles with delegation and maintaining team morale.

Findings:

• Shortfall in Skills: Leadership and team building, particularly in delegation and maintaining morale.
• Areas to Focus On: Enhancing leadership skills, fostering a positive company culture, and improving team dynamics.
• Strengths: Deep industry knowledge, innovative product ideas, and a strong personal commitment to the company’s mission.

Impact and Management: To address these issues, we could implement a multi-faceted support strategy:

1. Leadership Coaching: We might provide our own workshops with the founder or arrange for the founder to work with a leadership coach specializing in B2B technology environments. This coaching would focus on developing delegation skills, effective communication, and team motivation.
2. Team Building Workshops: We could organize workshops to improve team cohesion and culture. These might include team-building activities, conflict resolution training, and establishing clear communication channels.
3. Regular Feedback Sessions: We might institute regular feedback sessions with the team to ensure that issues are addressed promptly and that the founder can make necessary adjustments to their leadership approach.

By focusing on these areas, we would help the founder develop into a more effective leader, which in turn would improve team performance and morale. This would not only resolve the immediate challenges but also position the company for sustainable growth.

Case Study 3: Leveraging Strengths in Market Strategy

Scenario: A B2B platform connecting manufacturers with global distributors might have a founder with exceptional skills in market analysis and strategy but lack experience in product development and technical execution. The DD process might highlight the founder’s strong strategic vision and market understanding as key strengths.

Findings:

• Shortfall in Skills: Product development and technical execution.
• Areas to Focus On: Building a capable technical team and establishing a clear product development roadmap.
• Strengths: Market strategy, competitive analysis, and strategic vision.

Impact and Management: To leverage the founder’s strengths while addressing the skill gaps, we could take the following steps:

1. Technical Co-Founder: We might help the founder identify and recruit a technical co-founder with a strong background in developing B2B platforms, ensuring that the company has the technical leadership needed.
2. Structured Product Development: We could work with the new technical co-founder to establish a structured product development roadmap, aligning it with the founder’s strategic vision and market insights.
3. Resource Allocation: We might advise on resource allocation to balance market strategy with technical development, ensuring that both areas receive the attention and investment needed.

By aligning the founder’s market strategy skills with a strong technical foundation, we would position the company to develop innovative products that meet market needs effectively. This strategic alignment would maximize the founder’s strengths while mitigating risks associated with the initial technical shortfall.

The Core Elements of Our Founder Due Diligence

Our founder DD is an iterative process that combines various elements to paint a comprehensive picture of the founders we consider for investment. Here’s an in-depth look at some of the core elements:

Personal Interviews

The personal interview is a cornerstone of our DD process. We spend substantial time with the founders, not just to understand their business but to get to know them as individuals. These interviews are designed to uncover their motivations, values, and vision.

Example Interview Questions:

• “ What do you enjoy both personally and professionally?”
• “ What were you hired for in your previous role and what were the outcomes?”
• “ What was your lowest/most difficult point in your career?”
• “If you had to work for someone, what would be your dream job?

These questions help us gauge their resilience, problem-solving skills, and ability to lead under pressure. I provide more insight into the questions I personally like to ask here, in my hiring guide.

Peer and Reference Checks

Peer and reference checks are critical to validate the information provided by the founders and gain additional insights from those who have worked closely with them. We reach out to former colleagues, mentors, and industry peers to get a well-rounded view of the founder’s capabilities and character.

Key Questions for References:

• “Can you describe the founder’s leadership style?”
• “How did they handle challenges and setbacks?”
• “What could they improve on?”
• “What do you like about how they work?”
• “What do you like about them as a person?”
• “Would you work with them again? Why or why not?”

Scenario-Based Assessments

Scenario-based assessments are designed to evaluate the founder’s decision-making abilities in real-world situations. We present founders with various hypothetical scenarios that they might encounter in their business journey and ask them to outline their approach and response.

Example Scenarios:

• “Your company is facing a significant cash flow crisis. What steps would you take to manage the situation?”
• “A key team member suddenly leaves the company. How would you address this internally and externally?”
• “Your product receives a wave of negative feedback on social media. How do you handle the situation?”

These assessments provide valuable insights into the founder’s strategic thinking, crisis management skills, and ability to remain calm and effective under pressure.

The Continuous Nature of Founder Due Diligence

Founder DD is not a one-time activity. At Verb Ventures, we believe in continuous engagement and assessment. As the company grows and evolves, so do the challenges and opportunities. Maintaining an ongoing dialogue with the founders allows us to support them effectively and make timely interventions when necessary.

Ongoing Support and Check-Ins:

• Regular Updates: We hold regular meetings with the founders to review progress, discuss challenges, and provide feedback.
• Milestone Reviews: At key milestones, such as product launches or funding rounds, we reassess the founder’s priorities and strategies to ensure alignment with the company’s goals.
• Mentorship and Resources: We connect founders with mentors, advisors, and resources that can help them navigate specific challenges or seize new opportunities.

Building a Culture of Accountability

A significant aspect of our founder DD process is fostering a culture of accountability. By setting clear expectations and documenting the founder’s commitments, we create a framework for accountability. This not only helps in maintaining alignment but also builds trust and transparency.

Key Practices for Accountability:

• Documenting Priorities: During the DD process, we document the founder’s stated priorities and strategies. This serves as a reference point for future assessments.
• Setting Milestones: We work with founders to set realistic and measurable milestones. This helps in tracking progress and making necessary adjustments.
• Regular Reviews: Conducting regular reviews ensures that the founders remain aligned with their stated goals and allows for timely interventions if needed.

The Psychological and Emotional Aspects of Founding a Startup

Starting and leading a startup is not just a professional challenge but also a deeply personal journey. The psychological and emotional well-being of the founder can significantly impact their performance and the overall success of the company. Our DD process takes into account these aspects, ensuring that we support founders holistically.

Psychological Resilience:

• Stress Management: We assess the founder’s ability to manage stress and pressure. Founders who can effectively navigate stressful situations are more likely to lead their companies successfully through tough times.
• Emotional Intelligence: High emotional intelligence is crucial for effective leadership. Founders who can empathize with their team, manage their own emotions, and build strong relationships are better equipped to create a positive and productive work environment.

Work-Life Balance:

• Sustainable Work Practices: We encourage founders to adopt sustainable work practices that prevent burnout. This includes promoting work-life balance, taking breaks, and seeking support when needed.
• Personal Development: Continuous personal development is essential for founders. We support them in pursuing learning opportunities, seeking mentorship, and developing skills that enhance their leadership capabilities.

The Role of AI in Founder Due Diligence

Artificial Intelligence plays a role in our DD process. By leveraging AI, we analyse large volumes of data, identify patterns, and gain insights that might not be immediately apparent through traditional methods. It is not something we wholly rely on but it’s an important tool to ensure we’re seeing the full picture.

AI-Driven Insights:

• Data Analysis: AI helps us analyse responses to our questionnaires, identifying nuances and inconsistencies. This ensures a comprehensive understanding of the founder’s mindset and capabilities.
• Pattern Recognition: AI can recognize patterns in the founder’s behaviour and decision-making processes, providing predictive insights into their future performance.
• Continuous Learning: AI systems continuously learn from new data, improving their accuracy and reliability over time. This enhances our ability to support founders effectively.

The Practical Benefits of Comprehensive Founder Due Diligence

Comprehensive founder DD offers several practical benefits that contribute to the success of our investments and the startups we support.

1. Risk Mitigation: Thorough DD helps us identify potential risks early on. By understanding the founder’s strengths and weaknesses, we can anticipate challenges and take proactive measures to mitigate risks.

2. Strategic Alignment: Founder DD ensures that there is strategic alignment between the founder’s vision and our investment goals. This alignment is crucial for building a strong partnership and achieving long-term success.

3. Enhanced Support: With a deep understanding of the founder, we can provide targeted and effective support. Whether it’s connecting them with mentors, offering strategic advice, or providing resources, our support is tailored to their specific needs.

4. Improved Investment Outcomes: Ultimately, comprehensive founder DD leads to better investment outcomes. By backing founders who are resilient, adaptable, and strategically aligned, we increase the likelihood of successful exits and positive returns for our investors.

The Future of Founder Due Diligence at Verb Ventures

At Verb Ventures, we are committed to continually refining and enhancing our founder DD process. As the startup ecosystem evolves, so do the challenges and opportunities. By staying ahead of the curve and leveraging the latest tools and methodologies, we ensure that our DD process remains robust and effective.

Founder DD is more than just a part of our investment process; it is a cornerstone of our philosophy. We believe that great companies are built by great people, and our dedication to understanding and supporting those people sets us apart in the venture capital landscape.

In the dynamic and often unpredictable world of startups, founder due diligence is our compass. It guides us in making smart investments, supporting founders effectively, and ensuring alignment between their vision and our expectations. By going the extra mile in understanding the people behind the businesses, we set the stage for long-term success and accountability.

We believe that great companies are built by great people. Our founder DD process is a testament to our commitment to finding, understanding, and supporting those exceptional individuals who have the potential to lead their startups to new heights. Through a meticulous, thorough, and enlightening DD process, we ensure that our investments are not just financially sound but are also driven by capable and visionary leaders.

If you’re a founder looking to build a lasting and impactful company, we’d love to hear from you. Our door is always open for passionate and driven individuals ready to make their mark on the world.

Tom Wesseldine | Partner | tw@verb.ventures