How do investors do due diligence on independent sponsors & searchers prior to investing?

October 05, 2021

by an investor from Harvard University in Denver, CO, USA

I saw someone pose this question on Twitter today and I thought it would make for an interesting discussion here on Searchfunder.

Investors: Assuming you find the deal attractive, how do you do due diligence on new searchers or sponsors? Reference checks / background checks / etc?

Searchers and sponsors: What experiences have you had with prosepective investors doing DD on you (rather than on your deal) that made you more or less interested to work with them?

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Reply by an investor
from Michigan State University in Chicago, IL, USA

Someone else will post a more thorough response, but one key thing to me is that the searcher has to convince me they have the grit to run the business when they have to do hard, shitty work.

I see so many people coming out of banking/consulting/PE/straight from MBA who haven't had to cover a blue collar shift when someone calls out. (And list here the other 10,000 things that go wrong in small business ownership.) At some point, it's going to be human nature that when someone is literally cleaning toilets, under water on their SBA loan, making $100,000 (assuming they can still pay themselves a salary) that they consider going back to life in a downtown skyscraper flying first class to client meetings and making $600k.

When that moment comes, convince me you still want to shovel the shit :)

PS. This is one reason ex-military over-represent in search -- they know how to do very very hard work in bad conditions for little money and not quit. (

Reply by an investor
from Northwestern University in Boulder, CO, USA

Jeff - we like to conduct both reference checks and background checks on self-funded entrepreneurs or independent sponsors we're interested in working with. The focus of the background checks (criminal, employment/education verification, and financial) is self-evident. My advice is that if you have a blemish on your record, you mention it before the check. It's always better to discuss it upfront than to let the check reveal it. The focus of the reference conversations is to understand how you respond to hardship, failure, and significant challenges. We also like to have entrepreneurs complete some behavioral and cognitive assessments that help us get behind the "what have I done" conversations and better understand the contexts in which folks are most comfortable, how they communicate, how they adapt, how they make decisions, tolerate risk, etc... We find that discussions are these concepts help entrepreneurs anticipate areas where they may experience leadership difficulty, or where behavioral tendencies may be counter-productive. Beyond that, we like to understand how thoughtful they are their personal objectives and the investor team they'd like to assemble for the deal. Assuming they're interested in more than just capital, we hope to find alignment around investment objectives, hold/exit timelines, advisory or board participation expectations, and any other idiosyncratic conditions they hope to achieve with the deal. I'd be happy to discuss it directly if you'd like.

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