Win by Removing Risk

The Lesson from a Failed Startup

The most valuable lesson I learned from a failed startup in 2009 was that I chose poorly.

My emotions had run the entire selection process. I was excited about the project and the problem we would solve, motivated by the CEO's passion and experience, and with that, I invested my time and talent.

What could go wrong?

As it turned out, plenty went wrong with that scenario.

After a few months, it became clear that I had made a very risky choice to invest my time.

There was inadequate funding for the project, and product-market fit had not been established. Also, the engaging leader was an established visionary but not a great decision-maker.

In reflection, I realized my emotions blinded me to red flags that could have been identified with some questions and digging beyond my excitement.

Ultimately, this cost me a year of my career.

If you want the full story, check it out here 👉️ [link].

The Red Flags I Ignored

After a few months, it became clear that I had made a very risky choice to invest my time.

•  Inadequate funding for the project.

•  Product-market fit had not been established.

• The engaging leader was an established visionary but not a great decision-maker.

The Importance of Due Diligence

Lack of an Emotionless Evaluation Process

Through this experience, I learned the hard way that I lacked an emotionless process to evaluate the product, company, the leadership team, and the offer to see if it fit my goals.

This crucial evaluation process is known as Due Diligence.

When you watch people make a series of investments, and many of them go well, people want to attribute it to luck.

It is easier for the casual observer to associate success with luck or random chance than to understand what happened.

Great investors of time and money develop processes of due diligence.

"Due Diligence is the mother of luck." – Benjamin Franklin

What is Due Diligence?

The process of analyzing an investment and operator before making an investment.

A due diligence process allows an investor to understand the investment and identify where the risk lies.

Examples of Due Diligence in Practice

Warren Buffet, the greatest investor of our time, conducts an arduous due diligence process before making an investment.

So do other investors in stocks and private equity. It is known and understood that before dollars are exchanged, a lot of work and diligence will be done.

Many people who work for tech equity to build wealth have a due diligence process to verify the leadership team, product quality, customer sentiment, and company financials.

Why Investors Use Due Diligence

Reduce risk: By reducing their investment risk, they increase their probability of success.

For anyone investing their time and talent, understanding the benefits of due diligence is crucial, especially because you are investing your most valuable asset: time.

5 Benefits of Having a Due Diligence Process When Trading for Tech Equity

1. Risk Mitigation: Identify and assess potential risks associated with the investment.

   • Make informed decisions and potentially avoid costly mistakes.

   • Example: Having a straightforward process of similar questions you ask around the product, customer satisfaction, and financial performance to multiple interviewers can help you quickly weed out companies that are struggling now and can continue.

2.  Informed Decision-Making: Provides a comprehensive understanding of the investment opportunity.

   • Enables investors to make more educated and confident decisions.

   • Example: When interviewing for multiple companies, create and use a set of questions about the problem the product solves, customer sentiment, financial performance, and leadership. Have these questions answered by all the companies you interview with, and line up the results side by side.

   • This simple process will ensure you have gathered the information you need to make an informed and balanced decision and not rely on feelings or gut instinct.

3.  Negotiation Leverage: Information gathered during due diligence can be used to negotiate better terms or a more favorable deal structure.

   • Example: Asking clarifying questions about how your role will impact the company.

     • What is the problem they want your role to solve, and how does it relate to the business goals and timing?

     • This kind of information can provide you with key leverage when it is time to negotiate for your salary and equity.

     • Due diligence is not just determining the value of the equity but also how you can gain leverage in negotiation.

4. Identification of Strengths and Weaknesses: Helps investors recognize both the positive aspects and potential shortcomings of the investment opportunity.

   • Example: With a due diligence process, it becomes easy to see where a business has distinct advantages and where they struggle.

   • The more you perform this process in interview preparation and interviews, you will start to spot key differentiators easier.

5.  Valuation Accuracy: Ensures that the valuation of the investment is fair and based on accurate, comprehensive information.

   • Example: A solid due diligence process will help you understand the value of the company you are going to work for and the equity presented to you.

   • Ultimately, this is why you execute this process: to understand what has the potential to grow in value and what won’t.

Enhanced Success Probability

By thoroughly vetting the investment opportunity, due diligence increases the likelihood of a successful outcome.

Developing Due Diligence Skills

• Building due diligence is a skill.

• As you go on interviews throughout your career, you will continue to hone this process.

• This skill is not just valuable for trading your time and talent for equity.

• Due diligence is a fundamental skill to all investing.

• Learning and practicing over time will make you a better investor of time and money.

• You get two benefits from learning one skill.

Reflecting on My Journey

Reflecting on my journey, it's clear that due diligence is the essential step in the investment process that helped me choose to work for three companies that went through an IPO.

It was by eliminating the risk that I created my luck.

This is because due diligence helps mitigate risks and enhances the potential for successful outcomes by providing a thorough understanding of the investment opportunity.

Proper due diligence is crucial for making sound investment decisions when trading your time and talent for equity.

Tech Equity and Money Talk is a weekly podcast showing you how to work for tech equity as a wealth-building strategy and meet your financial goals.

065🎙️ Public Company Due Diligence for Tech Employees with Brian Feroldi

If you want to learn how to choose growing and valuable public companies to get equity compensation in then this episode is for you!

Brian Feroldi is a financial educator who also used to work in tech. In this value-laden episode, we walk through his process of selecting a public company to work for.

Brian uses his skill as a stock analyst and experience working for equity to put together a comprehensive strategy.

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1.) Get started on your learning - 🎧️ Follow our Podcast

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Disclaimer: This newsletter is for informational purposes only and does not constitute financial or career advice. Always consult with qualified professionals before making any decisions based on the information provided.