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I have brought this up in another comment, but my experience in the VC world is that it operates too heavily based on 4 types of "trust": 1) Institutional

I have brought this up in another comment, but my experience in the VC world is that it operates too heavily based on 4 types of "trust": 1) Institutional trust (Stanford, Harvard, MIT, "ex-FAANG", "ex-McKinsey", etc.), 2) Social trust (someone you know that has already established one of the three other kinds of trust), 3) Serial trust ("3-exits", "former CEO/CTO/VP of..."), and 4) Transitive trust ("Sequoia invested in X; I trust Sequoia; therefore, I should invest in X") In many cases, this trust makes perfect sense. But it seems that in more than a handful of high profile cases, these types of investments based on trust has superseded basic due diligence, skepticism, and common sense.

rossjudson 3y ago
I've always had this background thought that it would be a fun job to do "due diligence" on behalf of VCs. I remember being on the receiving end of some of that work, and I wasn't all that impressed. Do today's VCs take technical due diligence seriously? If not, why not?
- afavour 3y ago
  > Do today's VCs take technical due diligence seriously? If not, why not? Because they're worried they'll miss the boat. Maybe less true in these not-quite-so-booming economic times but not so long ago VCs were literally competing to get in on rounds of funding for hyped up startups. The fact that the hype often never amounted to anything didn't seem to matter, if so-and-so was investing then you wanted to be in on that too or you'll look bad.
- FormerBandmate 3y ago
  Tiger Global and SoftBank made tons of money by doing zero due diligence in 2020. It inexplicably became a phenomenon
- makestuff 3y ago
  I think the issue is in the last few years hot startups would just say sorry we are going with another firm. There was so much money flying around it was similar to home buyers buying houses with all cash offers and waiving inspections.
  - SV_BubbleTime 3y ago
    Another positive of the free money era on pause.
    - orangepurple 3y ago
      ZIRP is the technical term
- gizmo 3y ago
  VCs don't invest their own money. VCs are paid a percentage of the money they invest in startups. As a result VCs only care about the quality of the investment they make insofar it helps them raise more money in the future. Because more money = more fees. VCs care about technology sometimes, but not always. If a startup doesn't grow because their tech is bad that's something VCs care a lot about. If a startup grows fast with snake oil tech (e.g. crypto, theranos, wework) VCs will happily throw more money at them.
  - gfdsgfsdgfs 3y ago
    This is not true. VC general partners do invest their own money.
    - fakedang 3y ago
      Yeah,like sub-5% of the fund size.
  - DonsDiscountGas 3y ago
    My understanding is that VCs with healthcare experience didn't invest in Theranos. Holmes' family was well connected, and they invested in a family friend.
- pintxo 3y ago
  Same here, I had some of the most fun checking out potential investors in my last company. I'd certainly enjoy also checking Startups, but really just any sort of tech-related due-diligence would be awesome. Now, how to make a business out of that?
- nickstinemates 3y ago
  VCs have technical people they go to for advice. I have served in such a capacity a number of times. Good to trade in favors.
- x0x0 3y ago
  For the enterprise saas business we built, vc duedil was talking to customers, both directly via our introductions and backchanneled via their network. For the technical aspects, our vcs didn't / don't care. That's our job to figure out, and if we don't, they fire founders. I'm honestly not sure how you would seriously audit chat app numbers, and I suspect and hope Abraham Shafi is going to prison. For most businesses, if you have to seriously audit things like that, you probably shouldn't be investing. A company inflating their numbers by 20x will be pretty hard to detect, and our safeguard as an industry is that's fraud, and people go to prison for committing fraud.
  - CharlieDigital 3y ago
    It's not that hard. - Look at the application logs - Look at the emails and reach out to a sub-sample of them to determine if they are real users - Look at the network traffic/volume numbers - Look at the architecture to see if it could actually support that volume - Look at the pattern of content in a random sampling to see if it's just "Lorem Ipsum" or actual, real content Just some heuristics I'd use off the top of my head. I've had to do some technical DD in the past and there are always ways of determining legitimacy of claims. The consequence of not doing even basic DD are outcomes like the $174m fraud that JPMC eventually discovered: https://www.theverge.com/2023/4/5/23671000/jpmorgan-frank-fraud-fintech-startup-ceo-javice-charged-student-financial-aid https://www.theverge.com/2023/4/5/23671000/jpmorgan-frank-fr...
    - smartest-on-hn 3y ago
      [flagged]
- rvba 3y ago
  Technical due dilligence isnt that important. The first thing is that the product has to scale, be popular, then maybe make money. You can always hire people who will rewrite. The opposite doesnt work. Technically brilliant product might be unpopular or unknown. Please note: I dont say that things should be built poorly.
  - raverbashing 3y ago
    > Technical due dilligence isnt that important. I suspect some Theranos and uBeam investors disagree with you
    - sroussey 3y ago
      Very much depends on the market. A marketplace app establishing a great user base? What will the intrusive technical due diligence get you? Very much depends on the stage. At Idea Stage or Prototype what are you looking at exactly? Series C biotech though…
  - CharlieDigital 3y ago
    In many cases, there's a fine line between "technical" DD and just "DD". Case in point is the JPMC acquisition of Frank and Frank's CEO Charlie Javice. Turns out all of the user numbers were made up. A technical DD would have easily surfaced this even though the user numbers and volume is business related.
- blueboo 3y ago
  They do but it’s a matter of time constraints. Pace. Deal flow. Take too long to scrutinise a good thing and it’ll be snapped up from under you. The group that poached might have even less time to do proper due diligence. VCs tap expertise for due diligence in all sorts of mostly-informal ways. But for proper, compensated investigations there’s almost never enough time to build a case you’d stake your reputation on
peter_d_sherman 3y ago
Hi Charlie! You could be onto something here... what you have enumerated seem to be examples of various forms of "Social Proof" (for lack of a better way of saying/defining it). It would be interesting, highly interesting, I think, to try and enumerate all of the possible forms of Social Proof. You've definitely nailed 4 of them -- but are there others? What if we broaden our search outside of the VC world? Whatever the case, whether we call this "Social Proof", "Trust as it manifests in the world of VC", or some other name/nomenclature -- I think you're definitely onto something here... It's sort of like what you've said could be the summary/abstract of a Ph.D. paper. That is, I think there's some more knowledge to be gained by exploring this set of ideas further, perhaps in writing, perhaps in blog article, I don't know... But I do know that you're definitely on to something... I would love to see more exploration of what you've just said... There's definitely something there...
- peter_d_sherman 3y ago
  Actually, when I think about it some more -- perhaps the broader topic area here is not necessarily that about "trust" or "social proofs" -- maybe it's about "Credibility" -- what causes a person or organization or business or business idea -- to have credibility (or apparent credibility as some cases may be) -- especially when large amounts of money, large financial transactions, large investments -- are at stake? Well, I don't know... but again, I reiterate that I think you're on to something with your observations...
  - thephyber 3y ago
    “ I think you're on to something with your observations...” The parent described 4 of the common heuristics of how we develop trust. I work in cybersecurity, so I tend to mentally put a “how could these heuristics be abused to get a well intentioned employee/customer to misplace their trust in a scammer?” scenario. When it comes to society, I have been trying to empathize with those poor souls who fell for QAnon, Stop the Steal, Flat Eartherism, and dozens of other farcical claims that millions of people have adopted, despite some of those people being extremely bright. Your parent is not really “onto something”; they are just enumerating a few heuristics that marketers, salespeople, people of influence, scammers/conmen have known for millennia.
Solvency 3y ago
Non-native English speaker here. What does "serial" mean in this context? Is it referring to a linear record of achievements/prior employment?
- cooperaustinj 3y ago
  Sequential/ordered. One after another.
  - keithwhor 3y ago
    Notably, relating to a series of events. Serial.
- marcosdumay 3y ago
  Yes, it's referring specific to a "large quantity" aspect of it. If you achieve some X, and then achieve X again, and again, people will trust you to achieve X again. Of course, that leads to people faking past successful startups. There are plenty of successful serial entrepreneurs out there that sold stuff for pennies to their family or something like that.
  - sroussey 3y ago
    Someone that has failed has learned valuable lessons on someone else’s dime. That can be more valuable that someone that got lucky to get success. Unless they figured out how to get lucky, then definitely follow the leprechaun…
- krater23 3y ago
  Serial trust like in serial killer.
  - deleted 3y ago
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onlyrealcuzzo 3y ago
> 3) Serial trust ("3-exits", "former CEO/CTO/VP of..."), and Serial trust is especially interesting for me. Someone could have founded 3 companies that weren't good investments (possibly all lost money), and VCs will throw money at that person before they try someone new. Transitive trust is also interesting. The majority of "rockstar VCs" made one good investment. Not really possible to rule out luck... And the majority of the people there now had nothing to due with that decision way back when.
- CharlieDigital 3y ago
  Serial trust is definitely an interesting one. I've been acquainted with a CEO/founder who -- for all intents and purposes -- was just not that bright but he came from a fairly well off family and his LinkedIn tagline proudly had "3-time exit" even though those exits didn't yield any significant (if any) financial gain for him personally.
mahmoudimus 3y ago
100% this. Ranked in order, it would be: #3, #2, #1, and #4. - #3 is king. If you have a track record, trust comes quickly. - #2 is probably how 80% of investors invest. - #1 is when an investor takes a bet on an unproven entity (i.e. precursor to #3) - #4 is a bad investor, most likely a lemming. do not give them any power. they are dumb money with an investment strategy of "playing with the house"

rossjudson 3y ago

I've always had this background thought that it would be a fun job to do "due diligence" on behalf of VCs. I remember being on the receiving end of some of that work, and I wasn't all that impressed. Do today's VCs take technical due diligence seriously? If not, why not?

afavour 3y ago
> Do today's VCs take technical due diligence seriously? If not, why not? Because they're worried they'll miss the boat. Maybe less true in these not-quite-so-booming economic times but not so long ago VCs were literally competing to get in on rounds of funding for hyped up startups. The fact that the hype often never amounted to anything didn't seem to matter, if so-and-so was investing then you wanted to be in on that too or you'll look bad.
FormerBandmate 3y ago
Tiger Global and SoftBank made tons of money by doing zero due diligence in 2020. It inexplicably became a phenomenon
makestuff 3y ago
I think the issue is in the last few years hot startups would just say sorry we are going with another firm. There was so much money flying around it was similar to home buyers buying houses with all cash offers and waiving inspections.
- SV_BubbleTime 3y ago
  Another positive of the free money era on pause.
  - orangepurple 3y ago
    ZIRP is the technical term
gizmo 3y ago
VCs don't invest their own money. VCs are paid a percentage of the money they invest in startups. As a result VCs only care about the quality of the investment they make insofar it helps them raise more money in the future. Because more money = more fees. VCs care about technology sometimes, but not always. If a startup doesn't grow because their tech is bad that's something VCs care a lot about. If a startup grows fast with snake oil tech (e.g. crypto, theranos, wework) VCs will happily throw more money at them.
- gfdsgfsdgfs 3y ago
  This is not true. VC general partners do invest their own money.
  - fakedang 3y ago
    Yeah,like sub-5% of the fund size.
- DonsDiscountGas 3y ago
  My understanding is that VCs with healthcare experience didn't invest in Theranos. Holmes' family was well connected, and they invested in a family friend.
pintxo 3y ago
Same here, I had some of the most fun checking out potential investors in my last company. I'd certainly enjoy also checking Startups, but really just any sort of tech-related due-diligence would be awesome. Now, how to make a business out of that?
nickstinemates 3y ago
VCs have technical people they go to for advice. I have served in such a capacity a number of times. Good to trade in favors.
x0x0 3y ago
For the enterprise saas business we built, vc duedil was talking to customers, both directly via our introductions and backchanneled via their network. For the technical aspects, our vcs didn't / don't care. That's our job to figure out, and if we don't, they fire founders. I'm honestly not sure how you would seriously audit chat app numbers, and I suspect and hope Abraham Shafi is going to prison. For most businesses, if you have to seriously audit things like that, you probably shouldn't be investing. A company inflating their numbers by 20x will be pretty hard to detect, and our safeguard as an industry is that's fraud, and people go to prison for committing fraud.
- CharlieDigital 3y ago
  It's not that hard. - Look at the application logs - Look at the emails and reach out to a sub-sample of them to determine if they are real users - Look at the network traffic/volume numbers - Look at the architecture to see if it could actually support that volume - Look at the pattern of content in a random sampling to see if it's just "Lorem Ipsum" or actual, real content Just some heuristics I'd use off the top of my head. I've had to do some technical DD in the past and there are always ways of determining legitimacy of claims. The consequence of not doing even basic DD are outcomes like the $174m fraud that JPMC eventually discovered: https://www.theverge.com/2023/4/5/23671000/jpmorgan-frank-fraud-fintech-startup-ceo-javice-charged-student-financial-aid https://www.theverge.com/2023/4/5/23671000/jpmorgan-frank-fr...
  - smartest-on-hn 3y ago
    [flagged]
rvba 3y ago
Technical due dilligence isnt that important. The first thing is that the product has to scale, be popular, then maybe make money. You can always hire people who will rewrite. The opposite doesnt work. Technically brilliant product might be unpopular or unknown. Please note: I dont say that things should be built poorly.
- raverbashing 3y ago
  > Technical due dilligence isnt that important. I suspect some Theranos and uBeam investors disagree with you
  - sroussey 3y ago
    Very much depends on the market. A marketplace app establishing a great user base? What will the intrusive technical due diligence get you? Very much depends on the stage. At Idea Stage or Prototype what are you looking at exactly? Series C biotech though…
- CharlieDigital 3y ago
  In many cases, there's a fine line between "technical" DD and just "DD". Case in point is the JPMC acquisition of Frank and Frank's CEO Charlie Javice. Turns out all of the user numbers were made up. A technical DD would have easily surfaced this even though the user numbers and volume is business related.
blueboo 3y ago
They do but it’s a matter of time constraints. Pace. Deal flow. Take too long to scrutinise a good thing and it’ll be snapped up from under you. The group that poached might have even less time to do proper due diligence. VCs tap expertise for due diligence in all sorts of mostly-informal ways. But for proper, compensated investigations there’s almost never enough time to build a case you’d stake your reputation on

peter_d_sherman 3y ago

Hi Charlie! You could be onto something here... what you have enumerated seem to be examples of various forms of "Social Proof" (for lack of a better way of saying/defining it). It would be interesting, highly interesting, I think, to try and enumerate all of the possible forms of Social Proof. You've definitely nailed 4 of them -- but are there others? What if we broaden our search outside of the VC world? Whatever the case, whether we call this "Social Proof", "Trust as it manifests in the world of VC", or some other name/nomenclature -- I think you're definitely onto something here... It's sort of like what you've said could be the summary/abstract of a Ph.D. paper. That is, I think there's some more knowledge to be gained by exploring this set of ideas further, perhaps in writing, perhaps in blog article, I don't know... But I do know that you're definitely on to something... I would love to see more exploration of what you've just said... There's definitely something there...

peter_d_sherman 3y ago
Actually, when I think about it some more -- perhaps the broader topic area here is not necessarily that about "trust" or "social proofs" -- maybe it's about "Credibility" -- what causes a person or organization or business or business idea -- to have credibility (or apparent credibility as some cases may be) -- especially when large amounts of money, large financial transactions, large investments -- are at stake? Well, I don't know... but again, I reiterate that I think you're on to something with your observations...
- thephyber 3y ago
  “ I think you're on to something with your observations...” The parent described 4 of the common heuristics of how we develop trust. I work in cybersecurity, so I tend to mentally put a “how could these heuristics be abused to get a well intentioned employee/customer to misplace their trust in a scammer?” scenario. When it comes to society, I have been trying to empathize with those poor souls who fell for QAnon, Stop the Steal, Flat Eartherism, and dozens of other farcical claims that millions of people have adopted, despite some of those people being extremely bright. Your parent is not really “onto something”; they are just enumerating a few heuristics that marketers, salespeople, people of influence, scammers/conmen have known for millennia.

Solvency 3y ago

Non-native English speaker here. What does "serial" mean in this context? Is it referring to a linear record of achievements/prior employment?

cooperaustinj 3y ago
Sequential/ordered. One after another.
- keithwhor 3y ago
  Notably, relating to a series of events. Serial.
marcosdumay 3y ago
Yes, it's referring specific to a "large quantity" aspect of it. If you achieve some X, and then achieve X again, and again, people will trust you to achieve X again. Of course, that leads to people faking past successful startups. There are plenty of successful serial entrepreneurs out there that sold stuff for pennies to their family or something like that.
- sroussey 3y ago
  Someone that has failed has learned valuable lessons on someone else’s dime. That can be more valuable that someone that got lucky to get success. Unless they figured out how to get lucky, then definitely follow the leprechaun…
krater23 3y ago
Serial trust like in serial killer.
- deleted 3y ago
  [deleted]

deleted 3y ago

[deleted]

deleted 3y ago

[deleted]

onlyrealcuzzo 3y ago

> 3) Serial trust ("3-exits", "former CEO/CTO/VP of..."), and Serial trust is especially interesting for me. Someone could have founded 3 companies that weren't good investments (possibly all lost money), and VCs will throw money at that person before they try someone new. Transitive trust is also interesting. The majority of "rockstar VCs" made one good investment. Not really possible to rule out luck... And the majority of the people there now had nothing to due with that decision way back when.

CharlieDigital 3y ago
Serial trust is definitely an interesting one. I've been acquainted with a CEO/founder who -- for all intents and purposes -- was just not that bright but he came from a fairly well off family and his LinkedIn tagline proudly had "3-time exit" even though those exits didn't yield any significant (if any) financial gain for him personally.

mahmoudimus 3y ago

100% this. Ranked in order, it would be: #3, #2, #1, and #4. - #3 is king. If you have a track record, trust comes quickly. - #2 is probably how 80% of investors invest. - #1 is when an investor takes a bet on an unproven entity (i.e. precursor to #3) - #4 is a bad investor, most likely a lemming. do not give them any power. they are dumb money with an investment strategy of "playing with the house"