Filling Information Gaps: Experts
While most VCs know a lot about running businesses and investing, it is rare that a VC will know more about a specific business than the entrepreneur who is launching a company. The entrepreneur typically needs to have a unique degree of expertise and knowledge about his target market in order to devise a viable disruptive strategy. As a result, VCs typically have less information than the entrepreneur about the prospects of company that they are investing in. To mitigate some of this information asymmetry, VCs lean on experts.
‘Expert’ is a loosely defined term here. It includes anyone who knows a significant amount about at least one aspect of the market in question. An expert might be an analyst who spends every waking hour thinking about this market or it might be a person who knows a lot about one aspect of this deal, such as the technology, customers, a government regulatory body or competitors.
VCs contact these experts because they often provide the quickest way to learn a lot about an industry, enabling the VC to get another perspective about considerations that present concerns. In a one hour call, an expert can give a VC the scoop, laying out the industry dynamics and highlighting the key issues that they should be thinking about.
Furthermore, these experts can validate key assumptions. If the viability of an entrepreneur’s whole business hinges on a key factor, such as incumbents not entering the market or customers being really frustrated by the current value proposition offered in the industry, an expert can provide some validation.
Entrepreneurs should be aware that VCs are going to contact experts when they conduct due diligence. It is worth noting that they can do this without disclosing your business idea; these conversations are often one-way. Experts understand that the VC can’t disclose key information and usually don’t mind sharing their wisdom.
Entrepreneurs should use the knowledge that VCs will likely rely on experts to their advantage. Founders can both expedite and shape the due diligence process by identifying experts for VCs. This enables entrepreneurs to increase the likelihood that the VCs are hearing perspectives that support their vision and it cuts out the time that VCs spend in trying to find and connect with thought leaders.
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