Silicon Valley Investor’s Due Diligence Fail

Silicon Valley is known globally as the center of technology entrepreneurship and innovation. It is the hub of tech start-ups, full of hopefuls vying for funding from venture capitalists and angel investors. And many with money to spare are eagerly searching and awaiting the next big thing in tech to invest in.

 However, Silicon Valley recently has come under fire for the lack of due diligence from investors. Firstly, due diligence is the process of conducting a thorough investigation into a company’s financial and legal status. As well as the directors background. It ensures investors can make as informed a decision as possible and uncover any red flags early on that may signify fraud or mismanagement.   

Silicon Valley has gained a reputation for being home to numerous “unicorn” companies and startups valued at over $1 billion. While these companies may appear to be the future of tech innovation, they often have inflated valuations. Their financial performance, however, shows otherwise. Despite being an important part of making an investment, investors in Silicone Valley have come under fire for neglecting due diligence. Possibly due to their eagerness to invest in the next ‘Facebook’.

This has and will have consequences for both investors and start-ups. Companies which have the pressure of unrealistic expectations and inflated valuations are more likely to fail. Such was the case with Elizabeth Holmes’s Theranos which we have previously covered. It could be argued that the pressure of high expectations is what pushed the company to make bold and false claims. The onus should have also been on the investors, many of whom handed their money over to Theranos via word of mouth. If they had done proper due diligence, many would have saved themselves from the financial loss.

Toxic Culture

Another part of the problem is that Silicon’s Valley start-up culture is formed by a high-pressured, fast-paced tempo. Where rapid growth and scale is what measures success. Therefore, investors can feel pressured to pay up quickly and often, also to get in before their competitors do, which can lead to hasty decisions. Without doing any proper research prior. Due to this ‘fail fast, fail often’ culture, investors can prioritise speed and innovation over due diligence and long-term sustainability.

This culture is common and almost accepted in Silicon Valley; but not outside of that. The moment someone tries to create any time pressure on you to invest, or pushes the idea that you need to get in early or else, then that’s a giant red flag to not invest. If for whatever reason, the opportunity intrigues you, then due diligence is key. Understandably, it can sometimes feel like an arduous task, not knowing where to start or end. We offer pre and post investment due diligence services to give you clarity, and help you make a more informed decision when parting with your funds. To find out more, call us now on 020 7504 1300.

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Insolvency and Law Peter Murray is an award-winning consultancy firm specialising in Insolvency, debt purchasing and business rescue.

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