ADAP's Four-Hour Due Diligence, Part 1 of 3: Why we need a different approach

Slogging through diligence

Among early-stage social entrepreneurs, the problem is well known. When moving beyond friends and family investors to professional seed-stage investors, raising investment capital takes big chunks of an entrepreneur’s time and they are often left with the feeling that it is unwelcome distraction which takes them away from building their business. The process can drag on for many months, creating uncertainty that can severely hobble a growing but cash-poor company.

Lots of people recognize the problem. Entrepreneurs spend too much time chasing too few dollars for too long, yet because of a power imbalance between funders and founders, it persists. After all, an investor that drags out a decision for months before saying “no” doesn’t lose any cash, so there would seem to be little incentive for them to change. Indeed, they are often applauded by others for not losing money and for being deliberate. The fear of being seen as reckless becomes the primary motivator. As a result, thousands of dollars may be wasted in an excessive due diligence process, to say nothing of the cruel impact on the entrepreneurs and on the marginalized communities that should be their primary focus.

A Different Approach

Does that slow-moving investor really not lose anything? By deploying funds more slowly, they may be sitting on uninvested cash longer. By creating a reputation for being slow, they may miss out on access to the most promising entrepreneurs and companies - word of mouth among social entrepreneurs is very strong, as investors well know. By focusing the vast majority of their time on due diligence of an entrepreneur their value is significantly reduced.

ADAP believes that early-stage investors that move quickly and decisively - in an informed and evidence-based fashion - will be able to produce better financial returns and create greater impact over time. Early-stage investors that respect and collaborate with entrepreneurs have a better chance of generating a robust pipeline of great entrepreneurs and companies to work with in the future. Value can be created for entrepreneurs when they most need it, to help them establish and grow their business.

ADAP has developed and refined a rapid yet rigorous diligence process that is designed to take only four hours of the entrepreneur’s time. Hence, the “Four Hour Due Diligence." Part 2 of this series walks through the details.