COLONY Lab ESF Due Diligence Helpkit (Part 8/8): Other investors & backers

During your due diligence, this is not the best criteria, and it may even be flawed, but I’ll give it to you anyway.

It is the other people or parties that have invested or might be backing the project. These have put their money or reputation on the line and should be aiming to make the project a success. Thus, the stronger the partners, the better the odds are stacked in the project’s favour. Also, the quality of investors on the cap table may be a reflection of the potential of the product. If there are only S-tier investors involved, the potential of the project tends to be higher.

There are a few benefits that come from the investors/backers. The first is that the project can use the network or skill set of each investor or backer to their advantage. This increases the odds of the project to do partnerships, get integrations and build with other projects. The skill sets of each investor can also help with marketing, GTM, tokenomics, DAOs, anything that may be required.

The other benefit, and this is where this section is flawed, is that other investors/backers may have much more insight into the project or founders than we do. When there are higher quality investors, it may mean there is something special that we might not see. Throwing a glimpse over the investors/backers is always a good idea.

In the following document, you can find questions to evaluate a project with to help you do your due diligence. https://docs.google.com/spreadsheets/d/135AN4Pk2x-6m4Ldg-y3exbcuJPX_MkX-qqjQWk_U-ZU/edit?usp=sharing

Strategic investors

The Strategic Investors are the most deeply invested in the project. They enter early and bring more than just capital. These investors are more partner than investor since they offer their expertise in different areas. It can even be a mutually beneficial partnership for them since they may gain extra insights from the start-up they are backing.

These entities may already be known at our stage of investing since they enter at the same stage, or even earlier. The quality of these partners may have a substantial influence on the overall success of the project.

Incubators and accelerators

The way in which they assist may differ, the value they provide are quite similar. Incubators and accelerators both may provide an early-stage start-up with access to funding/capital, knowledge and expertise, greater networking opportunities, and even extra business support. Where accelerators are intensive programs lasting 3–6 months to rapidly grow a business, incubators may span over years to build a solid foundation for the business.

Both of these provide valuable resources and scale up a start-up much better than they could have done themselves. If your project is or has participated in such a program, that is a good sign.

Community backers

A project may also have the support of community backers. These can be individuals, groups or organisations that are focused on building an ecosystem of start-ups on a wider scale. Since community backers have a broad scope, any expertise that is given to or gained at a project, can subsequently be echoed through the wider ecosystem. The support community backers can give to a single project can be from capital and access to resources, to providing expertise and networking opportunities.

The benefit here is that knowledge is shared and everyone becomes smarter and more professional. A great example is Coinflipcanada from GMX, who is a community backer or Angel Investor at various projects. Using his knowledge, he can help the individual project, as well as the wider ecosystem.

Advisors and Experts

Where community backers have the general ecosystem in mind, Advisors and Experts tend to be solely focused on this one project. They, too, may offer capital, access to resources, expertise and networking opportunities. This is usually much more focused and specialised on this project and industry.

They may offer more of an edge since their advice does not echo throughout the space as a community backer does.

General conclusion

The flawed section does have its place. The other investors and backers of a project may be a factor in the success of a project. When extra resources are needed, albeit expertise or capital, these backers can provide it. The same goes for connections or more strategic guidance. The stronger the backers of a project, the more likely the project is to reach success.

The reason it is flawed, and this may be more a caveat than anything else, is that this can also become a slippery slope to laziness. FTX is the best example here. SBF had fooled only a handful of investors at the start. All the other investors, even the big firms which everyone looks up to, just assumed that the first investors had done their due diligence and invested along with them.

Don’t fall for the same trap.