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Comment by arethuza | Hacker News Reader

The only time I've been directly involved in that kind of scenario (as a co-founder during the first .com bubble) - there was some due diligence for the first round - but looking back it was almost comically superficial. Afterwards at subsequent rounds the amount of money grew stupendously but the due diligence disappeared completely - presumably because each of the myriad of investors assumed that somebody else was checking things.

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Due diligence is like work. If these VCs are only putting a million bucks into something it probably doesn't even make sense to do more than a cursory look over of the company. Their time is too valuable to waste on that. Most of these investments are already assumed to be a total loss, they only do them because when they do land on a hit the returns can be astronomical.

If only there was some method of exchanging money for the time of professionals capable of vetting a technical product and giving a summarized report.

VCs don't even have the time to source and coordinate professionals for vetting. They're weighing what they view as a million-to-one chance (because a VC principal thinks highly of their ability to detect a shady person) of a million-dollar loss due to fraud, and the >3 hours of time required to find a professional, get them under NDA, schedule them with the portfolio company... is worth far less to them.

I disagree, here [1] is a small clip from a really powerful documentary on the subject of Venture Capital and finance.

[1]: https://www.youtube.com/watch?v=xbBD7VIJ4cc

I work for a VC, and it's sort-of like this. Not so much because we think so highly of our ability to detect shady people, as because the checks we do are fine most of the time, and constantly being refined. But they do need to be cheap - it's not easy to place money and manage that portfolio for 5-10 years cheap enough to actually make a good return when factoring in investments that fail for reasons that are far harder to identify ahead of time than outright fraud.

The outright frauds are rare enough that checking for them needs to be very cheap for it not to be more cost-effective to spend that money improving other deal-flow filtering. That's not to say that VCs aren't trying to improve on it. It's just that fraud is just one of many risks, and managing risk is about taking a dispassionate view of which measures improve your returns the most.

I think we should consider whether there might be a social responsibility to not fund scammers. Rather than considering the matter purely from the perspective of the investor's bank account, we should consider the broader impact of allowing scammers to find investors. It degrades the reputation of the industry every time it happens, and frankly I think it degrades society. Every time a scammer is enriched, society as a whole is harmed.

Their time is not that valuable. If they don't vett they are just gamblers and that works as long as the estimated value of random choises is over 1.

Diligence is needed for bad investments, not good ones.

I would also assume that the ideal investment would be zero due diligence in a unicorn. Any serious due diligence will affect the unicorn negatively, lowering end price.

I would expect a good unicorn to have strong antibodies against wasting time providing due diligence data. Maybe leading to an over-diligent VC missing out on the one investment they actually needed.

Plus, I imagine the number of good investments that would have been excluded as being bad or fraudulent is high, and might include some unicorns. Either because it's hard to correctly vet, or enough things are fake it until you make it and actually randomly make it, or both.

I'm sure the only thing separating Theranos from some other major companies that made it in the end is that they just couldn't get the product working, even after all the time and money they threw at it. If they finally had something that worked before everything came to a head, they probably could have parlayed that something. Holmes might have still had to account for something, and it would have been rocky, but really success is all that seems to matter, especially when a lot of people have a lost of money riding on it and don't want to take it as a loss yet.

Just look at the history of Uber. So many times they screwed up majorly, but they just coasted on through. Money invested provides a momentum all of its own to a company.

> presumably because each of the myriad of investors assumed that somebody else was checking things

Would that be something akin to the "bystander effect"?

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