Monday, October 14, 2013

Due Diligence on Small VCs and Angel Groups

The largest VC funds have the resources to perform legendary feats of due diligence on startups.  They can hire private investigators and run background checks to verify that entrepreneurs really are who they say they are.  Entrepreneurs have little comparable power to investigate investor groups unless they've had training as private investigators, law enforcement officers, bank examiners, forensic accountants, investigative journalists, or intelligence analysts.  This asymmetric relationship cries out for remedy.

The National Venture Capital Association and Western Association of Venture Capitalists have very well-defined criteria for membership.  Smaller VC funds and angel groups will fly under NVCA's radar and escape notice.  Checking out investors through the National Association of Seed and Venture Funds or National Association of Venture Forums would help if either of those organizations had a verifiable address, contact person, or website.  Those all seem to be dark at the time of this writing.  The Angel Capital Association and Small Business Investor Alliance are active with venture investors.  The National Business Incubation Association tracks the enabling ecosystem for entrepreneurs.  If I were a startup, I would inquire with those types of organizations to see if the VC/PE/angel investor promising to commit to me has a verifiable reputation.

Local chambers of commerce can be a source of background info on prominent venture investors if they're in traditional hotbeds of startup activity.  Read that as Silicon Valley, Silicon Alley, Boston/Cambridge, and North Carolina's Research Triangle.  Startups in other parts of the country used to have to wing it the old fashioned way by asking around local merchant groups about their prospective investor's reputation.  That is about to change in a big way.

The crowdfunding revolution will be a blessing and a curse for both investors and entrepreneurs.  Startups will face more reporting requirements but a cottage industry of advisers will spring up to help them.  Crowdfunding portals must verify the status of their accredited investors before they can commit money, so a portal's validation is a clear indicator to a startup that a prominent investor has some bona fides.  The non-accredited investors are a different story, so startups must accept the risk that those folks are just like their mom and dad putting in a few hundred bucks for gas money.  This revolution will not be televised - it will be webcast, with embedded data.

BTW, you won't find Alfidi Capital listed in any of those national VC/PE organizations at the present time.  I am what I say I am:  a non-accredited investor with lots of Web opinions.  I'm on several crowdfunding portals as a spectator rather than an investor, and whatever I do on those portals will be in accord with what the SEC allows someone of my status to do.  If my cash and sweat equity investments in a handful of startups pay off, my status will change overnight and I'll be driving a Ferrari to meet VCs instead of my old Ford Mustang.  Right now I use crowdfunding portals to educate myself on startups in my favorite sectors and watch angel groups I've never seen before.  They all have to disclose their status and I get to see some of their potential deal flow.  That's my asymmetric remedy.