In recent years, the VC community has started to rethink its traditional approach to background checks in the due diligence process. Historically, VC firms have taken a ‘check-the-box’ approach to background checks to vet company founders, believing that reliance on their networks and in-person interactions with founders would counter-act any downsides of using low-cost and often-times instant screening background checks. However, high-profile scandals involving VC-backed companies have directly impacted the reputations of venture capital firms and the diligence expectations of their LPs.
The Data Says Otherwise
It is commonplace in the VC community to downplay the need or effectiveness of comprehensive checks. Still, the data shows that the leading VC firms have dramatically changed their approach to reputational diligence in the past few years. Vcheck has worked with 50+ venture capital firms, and seven out of the ten top-performing VC firms conduct deeper-dive background checks that have become industry standard for their PE firm counterparts. In fact, year-over-year, Vcheck has experienced a 26% increase in deep-dive background check requests from VCs and a 14% increase in the first quarter of 2024 compared to Q1 2023. This change reflects a growing awareness of the risks associated with fraudulent activities and the need to safeguard investments by thoroughly vetting founders.
The Rising Tide of Fraud in the Startup Ecosystem
Historically, VC firms have focused their due diligence efforts on evaluating the business model, market potential, and financial health of startups. While these aspects remain critical, there is a growing recognition that understanding the integrity and track record of the people behind the business is equally important. As Forbes noted in, “In the Post-FTX era, VCs Prioritize Founder’s Backgrounds,” reputational checks have become a cornerstone of the due diligence process. Deeper-dive background checks in the VC context typically involve a comprehensive review of an individual’s professional history, education credentials, legal disputes, social media presence, and any red flags that might indicate unethical behavior or a propensity for fraud. This scrutiny level helps investors build a more complete picture of who they are investing in.
The Future of Reputational Due Diligence and VC
All signs indicate that the trend toward deeper vetting of founders by VC investors will continue. The biggest hurdle to overcome is the mindset that the investment size does not warrant the cost of a standard check. However, this nominal cost pales in comparison to the reputational or legal damage facing investors if they do not ‘look under the hood.’ Moreover, as screening technology advances, the cost of these checks will naturally continue to decline, although we are a long way away from being able to remove human investigators from the equation, which is why Vcheck is committed to being human-led, technology-enabled.
About the Author
Dan McCartney is an Account Executive at Vcheck who works with leading VC and PE investors to help them safeguard themselves from unnecessary risk. Contact him at [email protected] to learn more about the background checks that Vcheck conducts for leading VC firms and how they can protect your reputation and satisfy the expectations of your LPs.
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