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VCs are toughening up their due diligence because they can't meet startup founders in person, as the pandemic imposes a work-from-home era

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  • Venture capitalists, like the rest of the global workforce, are looking to Zoom as a vital tool while they adjust to the new work-from-home era. 
  • But a lack of in-person meetings is still taking a toll on VCs trying to establish new relationships with startup founders, VCs told Business Insider.
  • Three VCs told Business Insider that they had begun heightening the due diligence they apply to potential investments — paying closer attention to personal references and startup financial plans — before offering any term sheets to founders. 
  • That diligence is especially important given the increasingly unpredictable business conditions, which have prompted VCs to both devote more attention to their existing portfolio companies, and also slow their investing pace to be more deliberate. 
  • Visit Business Insider's homepage for more stories.
Much like the rest of the global workforce, venture capitalists have gradually adjusted to the new work-from-home era. But some VCs say that video-conferencing tools like Zoom aren't enough to compensate for face-to-face meetings with founders, so they are making up for it by tightening their due diligence reviews of potential investments.
Last month, Business Insider sent out a series of questions to a panel of VCs to see how the coronavirus pandemic had changed their deal-making processes. The 18 VCs who responded had a varying degree of enthusiasm for Zoom, but there was a common thread among some of the answers. The investors said that it was harder to establish trust between startups and VCs without a single face-to-face meeting.
Three VCs told Business Insider that their firms were conducting more due diligence on startups than is considered typical, because they were unable to sit down in the same room with startup founders that may have looked good on paper. That means longer and more frequent virtual meetings with startup founders, and closer attention paid to a founder's personal references.
It also means that each startup's financial plans will be scrutinized more closely during fundraising, one VC said. Founders should be prepared to walk VCs through their startup's burn rate and cash runway, while explaining how the coronavirus pandemic has affected sales, the VC added.
The venture investors' comments shed light on the limitations of building trust in a new work-from-home era. While deals are still being made on Zoom, VCs are growing more cautious about beginning an entirely new relationship with startup founders under the current socially isolating rules.
In fact, one VC expects to make no new investments in startups, unless there has been a previous in-person meeting with the founder. 
Startups should be equally hesitant to raise funds under the current conditions, VCs advised. While at least five VCs suggested that startups hold off fundraising entirely, three suggested that startup founders tap into their pool of existing investors if they absolutely needed to raise money.
In addition to the barriers to personal contact, the economic uncertainty created by the coronavirus has also played a sizable role in how VCs are changing their typical due diligence processes, as well as their overall pace of investing.
The same observations made by the group of VCs queried about these issues had already come up in other Business Insider interviews.
Semil Shah, a partner at both Haystack VC and Lightspeed Venture Partners, had earlier told Business Insider that Haystack was establishing a procedure for sourcing deals remotely, a process that included increasing the level of diligence in their investments.
But Shah also added that VCs, forced to make tough decisions about how they invest their money, may not have the "mental headspace," to both triage portfolio companies and build new relationships with startup founders.
And even VC firms with plenty of new capital to spend are going to be more careful about the investments they make.
Lightspeed partner Ravi Mhatre told Business Insider in an earlier interview that the VC firm was looking to use the fresh $4.2 billion that it raised to "find people who are thinking big," but given that the investing environment had slowed so dramatically, the firm was going to be "deliberate" about the companies that it was choosing to invest in.
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