Shortcuts to Vet CEOs and Investment Professionals
Private Investor Due Diligence Mini-Series: Episode 3 - Shortcuts to Vet CEOs & Investment Pros
Investors, family office principals and joint venture partners who want simple ways to judge the character of the CEOs and managers they might back.
Summary
A smile, a bad meal and a drink or two can tell an investor more about a CEO than a ratio can. In episode three of the due diligence mini-series, Richard C. Wilson explains why the team matters more than metrics like IRR, LTV, alpha or cash on cash return. He then shares low-cost ways to screen the people behind a deal.
The talk covers a liquidity test used by an institutional consulting firm, a burnt chicken test used by another client, and a values filter based on the Boy Scout law. It also mentions Tim Draper's energy and the question Bezos asks about whether a founder is a mercenary or a missionary. Richard closes by urging viewers to screen harder and say no faster.
What to take from this talk
- Team matters more than the numbers. Most investors track payback period, IRR, alpha and NOI. Richard says a deal that looks amazing on paper but has a bad team is one he would not make. A deal that looks only okay with a team you trust may be worth considering.
- Watch how people behave over drinks. An institutional consulting firm took finalists out for drinks after the third meeting and called it the liquidity test. They listened for talk of suing partners, disloyalty, dishonesty or rudeness to staff. People often act differently once they are out of the office.
- Small stress tests reveal character. One client asks the waiter to burn the chicken on purpose during a meal. He then watches whether the CEO gets rude, makes a joke or just eats it. It costs little if a meal is already planned.
- Use your values as a filter. Richard asks which partner fits his values, and whether he is comfortable because of those values or only the numbers. He and his partners joke that anyone who does not fit the Boy Scout law is an outlaw, and they use it as a guidepost.
- Do more than a reasonable amount. Richard's goal is to leave very little room for doubt. He suggests asking what a family member would expect a careful steward of their money to do, then doing slightly more. Larger sums may call for more diligence.
In their words
"You can have something that looks amazing on paper, but if it's a bad team, then I would not make that investment."
"With due diligence, the goal is to do everything beyond a reasonable doubt."
"A lot of this comes down to more and more screens for yourself, so that less gets through, and you say no faster and you say no more often."
Key facts
- Equidos Capital, a consulting firm managing more than a billion dollars, ran its liquidity test over drinks after the third meeting.
- One client offered the waiter a 30% tip to burn a CEO's chicken on purpose and watched the reaction.
- The Boy Scout law has 12 values, which Richard and his motel to apartment conversion partners use as a guidepost.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Private Investor Due Diligence Mini-Series: Episode 3 - Shortcuts to Vet CEOs & Investment Pros. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around fiduciary duties, due diligence standards and offering documents. Do not use AI to write your own legal agreements.
Related questions
- How do I close a funding round?I close a funding round by focusing on investors who fit the opportunity and moving each interested prospect through clear, consistent follow-up.
- What documents do investors request during due diligence?Prepare a clear, organized package covering your operations, investments, compensation, team, and track record.
- How do I raise capital for my business?I raise capital by building a repeatable system for attracting the right investors, establishing credibility, and developing relationships before asking for money.
Questions about this video
What is the liquidity test?
It is the name an institutional consulting firm used for taking finalists out for drinks after the third meeting. They listened to what the person talked about once relaxed, such as lawsuits, disloyalty or dishonesty.
Why does Richard say team matters more than metrics?
He says a deal can look great on paper and still be a bad investment if the team is poor. A trusted, focused and credible team on an average-looking deal may still be worth considering.
What question does Bezos ask about founders?
According to the talk, Bezos looks first at whether a founder is a mercenary or a missionary. That means whether they want to grow something and flip it, or improve the experience for the customer.
Put this into practice with the data room checklist. See all due diligence resources.
