VC Kristina Simmons breaks down what due diligence should look like in 2023 (2024)

FTX’s Sam Bankman-Fried is under house arrest after being charged with fraud. Frank founder Charlie Javice was recently arrested. And Elizabeth Holmes is set to start her prison sentence later this month. Things are not always as founders say they are—and it’s one of the reasons why due diligence (or the lack thereof) has recently come under the spotlight.

Kristina Simmons, a former Lululemon operator, a16z partner, and the ex-chief of staff and investor at Khosla Ventures, thinks she can cut through all the noise, and that she’s figured out a way to pinpoint what a founder really believes and discern whether they’re telling the truth.

Simmons left Khosla in 2021 to go off on her own and launch her own firm called Overwater Ventures, and she recently closed her first $20 million fund, focused on early-stage founders building companies related to human and planet health. Since she launched her firm, Simmons has backed companies including Overstory, a startup that uses vegetation analysis to reduce power outages and wildfires, and Overture Life, which is focused on egg freezing and IVF. And she’s acutely focused on helping founders with both their ventures, but also their personal lives. Simmons has offered founders she works with free virtual workout classes, and she says she’s thinking about putting together a program for 24/7 mental health care access and resources for helping them manage their personal wealth.

Simmons recently sat down with me to talk about her unique approach to due diligence. There are the normal culprits, like background checks and reference calls. But Simmons takes things a step further to learn what makes a founder tick and whether they follow through on what they say they’ll do. Some of her strategies include discussing their personal values, studying the promises they made in old pitch decks, conducting a post-mortem on a challenge they’ve faced, or even climbing a mountain during a pitch meeting.

Here’s a portion of our recent conversation, and how Simmons pins down the founders she wants to work with. (Portions of this interview have been edited for brevity and/or clarity.)

Fortune: We talked last December, and one thing that really stood out to me about our conversation was how you had figured out a way to determine whether a founder who was pitching you was being honest or not. Tell me about that.

Simmons: One of the things that I think is really important is values and ethics—and what I was seeing in 2020 and 2021 is just not going to fly for the long term. A lot of mistakes, I think, were made in venture and in the market because you cannot make a decision with a company in a day or two days. This is a 10-year-plus relationship. You have to really spend time with the founder. You have to get to know them and how they think and how they operate.

My first meeting—it’s [usually over] audio because I think it’s actually a lot better than going through a linear presentation. I ask nonlinear questions and see how they respond. And I see how specific they can get and how on-point, versus whether they are distracting from the question or if they are able to answer it very directly.

So I spend time with the founders. I go through references, and that’s really where I start. If they’re technical, I reach out to their academic advisor. I think part of the problem with references is that people don’t ask the right questions, so I’ll try to ask, for instance, was this person in the 1% of your top students? If not, why? Or would you invest personally in this founder? Digging into how they really think versus the standard blanket questions I think is really important. And then I usually will run a workshop with the founder depending on what their biggest issues are, and I bring in their team members—and you learn a lot from how that founder interacts with their team, how they think about different problems. I stress test different scenarios usually, to see how they react.

How do you stress test scenarios?

There’s a few different ways, and it really depends on the biggest risks and challenges of the company. What we’ll normally do is I’ll say: Hey, if you were going to go this direction or this strategy, if you were going to do this in 10 years, what would be the implication, or what would be the protocol as you’re doing your clinical studies? Or if this doesn’t end up working out, what would you do instead? And so I try to understand the clarity in their thinking and how much they’ve gone into the weeds and thought about mitigating risks and creating opportunity.

Going back to what you mentioned earlier, just about 2020 and 2021—do you think that there’s a minimum amount of time that you really need to spend with a founder to get a good gauge of whether it’s someone you’d want to work with and support for the next 10 years?

I can’t say a specific timeline. But what I can say is that feeling like you understand how that founder thinks is really important. And so the time to do that is different.

I’ll give you a few examples. I think you’re able to get to know a founder so much better if you’re able to get out of the normal meeting room and get into their environment. So usually I think it’s really important to go in person to meet the team. I also think it’s important to know where is the founder their best. For instance, I did a pitch climbing a mountain with a founder. You can get out of PowerPoint or out of Google Slides and focus on: Okay, what are your challenges? What are you as an individual really about? And be able to learn a lot more about them faster. I also think about how can you get to know them in the best possible way over the fastest amount of periods, so you’re not wasting their time.

Which mountain did you climb with them? And I’m curious if they landed the investment?

The answer was yes. This is from the past. This is not for Overwater. I ended up climbing Grouse Mountain, which they call the natural stair climber. It was actually during the winter, so I even had my little snow cleats on the bottom of my shoes…I really got to know them in a totally different way than I would have in a formal setting.

This is very Lululemon, but I try to go for a walk or go for a run or go for a hike or go out to dinner so I get to know them…I also like to understand what the founder likes to do in their free time. What motivates them? If they’re spending 100% of their time in the office, they’re gonna burn out quickly. So I look at their own leadership development path as well.

When it comes to values and ethics, do you think it’s always possible to pinpoint whether a founder is a good person or not before you invest?

It’s a hard question to answer but what I really believe is that this is a 10-year-plus relationship for every deal. You have to like the founder. There’s a specific example where there was a company with an amazing vision, awesome technology—but it was really clear that the founder wasn’t really a pleasant person to work with. And ultimately, I vetoed that investment. I didn’t want to work with them. Because I think when you see those problems early, it usually leads to other problems.

See you tomorrow,

Jessica Mathews
Twitter: @jessicakmathews
Email: jessica.mathews@fortune.com
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