Thursday, July 21, 2005

Due Diligence, Customer Visits, and the Value of Face-to-face Meetings

Last week, I met with a good friend and start-up CEO. Mike is a veteran of multiple VC backed start-ups and a seasoned executive.

He asked me a very good question, "why is it that VCs call our customers during the investment process but rarely call/meet with our customers once they have made the investment?"

He went on to say, "in all the start-ups I have worked with, my investors did not make it a priority to get in the field, go on sales calls with me, and meet the customers on their premises to better understand our products, the sales process, and the market need. "

Along those lines....I recently had an experience that changed my strategy and perspective on the due diligence. As many of you know, when considering an investment, we always arrange to speak with the company's customers, management references, and key prospects. I have made hundreds of calls over my 3.5 years in VC, with the operative word being CALLS.

WRT the deal in question, I called their largest customer and spoke to the end-user. I went through a traditional set of questions...deal status, contract size and terms, other solutions considered, perceived product differentiation, installation and integration process, concerns or suggestions, rating of company and product, etc.

The caller provided me a glowing report. Right before I hung up, however, I realized I would be in San Jose the next day and offered to buy the customer lunch as a thank you. He readily agreed.

Over lunch, an amazing thing happened. In person, the conversation became much less structured and much, much more nuanced and free-flowing. In person, I picked up on visual cues, body language, and began to get a much less positive view on the company and its prospects. The lunch proved to be the defining moment in the diligence process and led to our passing.

Why were the interactions so different? In-person meetings provide verbal and physical cues and a level of connection that phone calls cannot match. Scheduled conference calls somehow limit non-linear discussions and tend to follow a more formal script or call and response protocol that restricts authentic communication. On a scheduled customer call, the customer tends to be less expressive and revealing. In person, however, I discover much more about their business, problems, context for evaluation of technology, and in-depth perspective on the company/product in-question.

Over lunch, I decided that when making material investment decisions that I will always, when possible, drive to the customer's premises and conduct the diligence session face-to-face. So far, very good.

Finally, I am taking Mike's advice and counsel to heart. I am going on sales calls with both prospective and current portfolio companies. While perhaps no surprise to many of you, the focus on "live meetings" and post-investment field sales calls is making me a better investor with much better insight into the companies, customers, and markets that I work in.

Thoughts?

Quick post-script to my original post here - another very good reason for in-person diligence calls is the following...developing friendships and great relationships...for every deal that I have diligenced, I develop a relationship with at least one great technologist whose input and perspective helps shape my thinking and direction long after the deal in question is completed.

3 comments:

  1. Body language, facial expressions, and non-verbal cues are definitely important when assessing information from and conducting dialogue with another person. Some of these reactions and expressions never leave us when we grow up although they can be quite visible in children.

    What I've never really thought about much consciously is how much indirect information one can get through phone calls (by sensing the tone of someone's voice or the language that they choose). I know that I get information, but it's largely instinctive and comes with experience ...

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  2. Anonymous1:50 PM

    I must confess that I have predominantly used phone calls, and I'm certainly going too give this a try.
    Thanks.

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  3. Our start up has just closed a round of investment. One investor (the state) wanted face to face meetings with domestic customers, the international customers, and an influential person in each of our channel types. Naturally, we provided that contact, but the people in these interviews were by nature "adopters" and "advocates". If you want a REAL view, go through one sales call where you and the company under review pick a new customer, that SHOULD buy the product (according to the target provided by marketing). Now that will give you whether people are taking your arm off for this product / service.

    Just a thought, having worked on both sides of the table myself.

    Regards
    Paul Sweeney

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