Do VCs or investors investigate what projects they invest money in? (Related to the latest faux pas)
Most startups that VCs invest in do not survive or succeed as originally planned.
According to statistics, only 1 – 2 out of 10 VC-backed startups end up as a major success or unicorn.
I read about how BuilderAI claimed to use artificial intelligence to create apps, but in reality, their code was developed manually by hundreds of engineers in India ("AI washing"), and they even raised with this fake idea around $ 450 M+ from such companies like Microsoft or Qatar Investment Authority, now they are bankrupt.
🥲
I understand that running and building any business is not easy, but sometimes I feel like VCs/investors are throwing money away completely irresponsibly without doing any investigation.
However, if they gave it to the right people based on proper research, something better could be invented or built.
Do you think VCs and investors should be required to conduct mandatory screenings of potential companies? In other words: "What should be done better?"
Because if they already do, they might not be doing it well, and it ends up damaging the reputation and credibility of both the investors and the startups they fund.
Replies
I think VCs do their checks, but hype often gets in the way, especially with flashy terms like “AI.” The BuilderAI case shows how surface-level vetting isn’t enough. If more thoughtful due diligence were the norm, real builders would get more of the spotlight (and funding, too).
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@nigarsafarova I am pretty curious how their due diligence looks like now. Because I find it pretty shallow. Imagine how many users can be scammed that way.
@busmark_w_nika Yeah, same here. The BuilderAI case feels like a real scandal, and it should be a wake-up call for both investors and founders. It’s not just about wasted money. Users, partners, and the whole ecosystem can be misled by overhyped promises. Hopefully, this becomes a lesson, not just another headline.
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@nigarsafarova Spoiler alert: It will not be and VCs will ignore it :D
Its a mix. The best ones dig in, talk to users, test the product. Other just follow trends. The latest misstep shows what happens when people skip the basics.
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@fredrick_james I think that they should create a similar document to the topics they want to fund, but instead, it should contain aspects they are gonna investigate.
Raycast
@fredrick_james @busmark_w_nika depends on the stage of product development. Unless the startup is in growth stage (and has verifiable evidence), VCs are often better on founders, a narrative, and momentum. Pre-seed to Series A is often too early to know for sure what a business is going to turn in to, or how it might succeed.
In the case of BuilderAI, like Riya (Ojos) 20 years ago, (which raised $19M on the story of facial recognition in photos when in reality it was performed by an enormous office full of Indian photo taggers in Bangalore), they make have decided to take the risk and arbitrage cheaper human labor in the short term, which would in turn train a model which would be their long term money making play.
Of course they could have also Theranos'ed their story and straight up lied, but that's why VC is a hot and extremely risky asset class. Typically one VC success pays for all your failures many times over, and it's often more risky to miss that hot deal than to be slow and do rigorous due diligence.
Put another way — the incentives are such that too much friction on the investment side means you'll never make back your fund, which means you won't last as a VC.
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@fredrick_james @chrismessina I got your point: It's better to invest than to regret not doing so.
But you have to be cautious, you don’t want to end up like Elizabeth Holmes of Theranos. 😅
i agree with most of the comments here. would just add that surface-level diligence (relative to other asset classes like private equity) is largely a function of 2 things:
VC math demands investing a small amount across a huge number of companies (each with a low individual likelihood of success). This limits the amount of diligence they can do on any one company. They're mostly betting on high quality founders in massive markets.
Hype and ego
Point 2 ebbs and flows with the cycle, always will.
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@emikes919 FOMO is real. I have seen many people investing in such bu***its just because someone presented it really well :D
@busmark_w_nika everything is easier when you just pick a good business from the get go!
I think if you invest hundreds of millions of dollars, there should be some way not only to dd before the purchase but have some monitoring of current state of the things and having some guardrails that if anything suspicious comes up it allows the company to stop investing and protect its fund.
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@nikita_polovinkin AFAIK, some VCs offer mentorship so companies could be led to achieve their goals, but it is hard to help when company has secrets :D
MyAlice for Shopify
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@umama_ashraf I am shocked that big brands/companies/names made such mistakes. Even Richard Branson. On the other hand, it is a good idea for a tool. :D Startup frauds investigator :D
Yes VCs research about companies. However, their motive is making more money. Most of the time, they will fire everyone then rehire you under their model. Some will break the company into specialized units to pump up the value. Some are just good at pitching but kill the company
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@mayoyo25 Would say that 90% of the whole business is convincing VCs to give you money :D you can sell anything but you need to know how to sell yourself, your project (even if it is not the good model), so they will have FOMO :D