Why Promising Venture Deals Go Bust

In a recent post for the OpenView Blog site, Associate Nick Hammerschlag takes an in-depth look at some of the most common reasons why venture capital deals fall apart post-term sheet.

“We aim to fund 100% of the companies with which we sign term sheets and complete our due diligence,” he writes. “But occasionally, we’ll discover something over the course of diligence that prevents us from continuing down the funding path.”

One common speed bump to the investment process involves when companies misrepresent the financial state of their business. Obviously, details like these are likely to come out during the due diligence process, but Nick notes that these misrepresentations are not always intentional.

Then again … sometimes they are.

“I suppose people do this in the hopes that an investor won’t figure it out, but the odds of that are extremely low,” Nick explains.  “All it does is waste a huge amount of time for both investors and company management alike, and take both parties away from otherwise productive activities.

In fact, many of the reasons promising venture deals go bad are in some way related to secrecy on the part of the prospective company. For example, Nick notes that all legal matters, such as litigations and IRS investigations, should be made clear from the start.

“Let us know at the onset so we can evaluate the situation and determine if it makes sense to go forward,” he writes.

For more reasons why venture capital deals fall apart, check out the full post at the OpenView Blog site.