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If the Shoe Fits: Due Diligence is Critical

by Miki Saxon

A Friday series exploring Startups and the people who make them go. Read all If the Shoe Fits posts here

5726760809_bf0bf0f558_mIt happens to founders with a strong creative streak, those who are focused on doing good, and the ones of any age, but often young, who “know [whatever].”

It happens most often to those who trust; who honestly believe that investors care about them as opposed to a 3X+ return on their investment.

Founders are often dazzled in the presence of success and so thrilled at the thought of funding they forget that part of due diligence is checking references.

They assume diligence and reference checks are a one-way street—checking on them.

They also forget that experience, objectivity and specialized training may be worth more than peer review and networking.

The story of Kari Sigerson and Miranda Morrison and their experience with Marc Fisher, heir to the 9 West discount-shoe fortune, should serve as a cautionary tale.

Not only have the women lost their company and even the right to use their names, but they have also been sued for almost $2 million by their former angel. Theirs is a story that may dissuade other young designers from seeking financial saviors.

What founders need to recognize is that the business side of any enterprise is critical to success and that, sadly, trust without contractual backup is prone to whims and change.

That’s the good news.

The bad news is that investors, who often know little and care less about topics such as moral, culture and intangible motivation, frequently dump successful founders.

Venture capitalists exhibit some strange behaviors, but none is more bizarre than the near-inevitable scheming to remove a company’s founder-CEO. Odder still is that these plans are often hatched just as the company begins to really perform. (…)Not every founder goes the distance, but it’s important that founder-led companies perform significantly better — a suggestive metric is that companies retaining their founders have produced substantially better returns than the S&P. There’s nothing surprising about this because thoughtful investors see no reason to interrupt a successful run and successful founders see no reason to leave their companies.

The key here is “thoughtful investors,” which brings us back to the importance of due diligence before you take the money.

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Flickr image credit: HikingArtist

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