Direct deals are where fortunes are made, and where they vanish overnight.
You've built wealth. You've earned the right to sit at tables where the best opportunities get whispered about first. But here's the truth nobody wants to tell you: most direct investors are walking into deals blind, betting millions on hope rather than systems.
I've watched families lose eight figures on "sure things." I've seen brilliant operators hand over equity without understanding what they signed. And I've helped investment committees clean up the wreckage after deals that "felt right" went catastrophically wrong.
The difference between winning and losing in direct deals isn't luck. It's not even access. It's process. It's rigor. It's having an Investment Committee that operates like your last line of defense against expensive mistakes.
Let me show you the seven mistakes that cost investors everything, and exactly how a properly structured IC can protect you.
MISTAKE #1: Running Due Diligence Like a Sprint When It Demands a Marathon
Here's what happens in most direct deals: You get the pitch. The numbers look good. The founder impresses you. Time pressure kicks in. You do a few calls, review some financials, and convince yourself you've done enough.
You haven't.
Most investment teams conduct rushed due diligence because they're resource-constrained and bandwidth-strapped. They rely on busy third parties who skim the surface. They take the founder's word on key assumptions. They skip the uncomfortable questions because the relationship feels fragile.
How Your IC Fixes This
Your Investment Committee should mandate a minimum of 40 hours of due diligence per opportunity. Not 40 hours of reading decks. Forty hours of actual work:
- Background checks on every key executive
- Reference calls with former employees, customers, and competitors
- Independent financial modeling that stress-tests the company's assumptions
- Operational deep-dives into unit economics, customer acquisition costs, and retention
- Legal review of existing cap table, shareholder agreements, and IP ownership
The IC's role is to be the bad cop. They demand the receipts. They ask the questions you're too polite to ask. They protect you from yourself when excitement clouds judgment.
No deal gets approved until every box is checked. No exceptions. No urgency-based shortcuts.
MISTAKE #2: Treating Every Deal Like a One-Time Event (When Most Companies Need Three More Rounds)
Most companies will raise capital multiple times. If you don't structure your initial deal with that reality in mind, you're setting yourself up to get diluted into irrelevance.
I've seen investors put in $2M at a $10M valuation, feeling proud of their 20% ownership, only to watch subsequent rounds dilute them down to 7% because they didn't negotiate pro-rata rights or anti-dilution protection.
How Your IC Fixes This
Your Investment Committee should evaluate every deal's expected funding trajectory before you write the first check. The questions they ask:
- How much runway does this capital provide?
- What milestones trigger the next raise?
- What's the likely valuation at Series B, C, and beyond?
- Do we have the capital reserves to participate in follow-on rounds?
- What rights do we need to protect our ownership percentage?
Smart ICs structure deals with protective provisions:
- Pro-rata rights to maintain ownership in future rounds
- Anti-dilution protection (weighted average, not full ratchet, stay reasonable)
- Information rights that keep you informed as the company scales
- Board observation rights or a board seat if the check size justifies it
The goal isn't to strangle the company with oppressive terms. It's to align your interests with theirs across the full life cycle of the investment.
MISTAKE #3: Forgetting That 7 Out of 10 Direct Deals Will Disappoint You
Let's get brutally honest: Most of your direct investments will underperform.
The data is unforgiving. In a typical portfolio:
- 1 out of 10 investments will generate exceptional returns (10x+)
- 2 out of 10 will produce modest returns (2-3x)
- 7 out of 10 will lose money, stagnate, or return less than you put in
If you're making big concentrated bets without a portfolio strategy, you're playing Russian roulette with your wealth.
How Your IC Fixes This
Your Investment Committee should mandate a minimum of 10 positions before you're fully deployed. This isn't about being timid. It's about math.
Diversification isn't dilution, it's discipline. Your IC should:
- Set maximum position sizes (typically 10-15% of the direct portfolio per deal)
- Require a clear exit thesis for every investment before capital deploys
- Track and report portfolio-level performance, not just deal-by-deal results
- Rebalance when one winner starts dominating the portfolio
The IC also forces you to ask the uncomfortable question before you invest: "If this goes to zero, does it change my life?" If the answer is yes, the check is too big.
MISTAKE #4: Negotiating Like You're Buying a Car (When You're Building a Partnership)
I've watched brilliant investors blow up deals because they couldn't stop negotiating. They fight over every basis point of valuation. They demand terms that signal distrust. They treat founders like adversaries instead of partners.
Here's the paradox: Overzealous negotiation often means you "win" the deal but lose the relationship. And in direct deals, relationship is everything.
How Your IC Fixes This
Your Investment Committee brings structured objectivity to valuation and terms. Instead of ego-driven negotiations, they ask:
- What's this business actually worth based on comparable transactions and financial fundamentals?
- Are we within a reasonable range, or are we arguing over noise?
- Do these terms protect our downside without crushing the founder's incentive to build?
Smart ICs empower negotiators to find balanced positions. They establish a walk-away price beforehand. They approve a "zone of reasonable agreement" where the deal works for both sides. They don't dismiss management's vision or waste weeks haggling over 5% of valuation.
The best investors I know negotiate hard on structure and soft on price. They'll pay a fair valuation if they can secure governance rights, liquidity preferences, and alignment mechanisms that protect capital.
MISTAKE #5: Deploying All Your Dry Powder Upfront (And Losing All Your Leverage)
Writing one big check feels powerful. It also makes you powerless.
If you deploy 100% of your capital on Day One, you have zero leverage if the company underperforms. You can't incentivize better execution. You can't tie future funding to milestones. You're just along for the ride, hoping management delivers.
How Your IC Fixes This
Your Investment Committee should structure investments in tranches tied to performance milestones. Example:
- Tranche 1 (40% of total commitment): Deploys at close
- Tranche 2 (30%): Deploys when the company hits $5M ARR
- Tranche 3 (30%): Deploys when the company reaches profitability or raises a successful Series A
This structure does three powerful things:
- Protects your capital if the business fails to execute early on
- Aligns incentives by rewarding performance with additional support
- Maintains leverage for governance and oversight conversations
Yes, founders will push back. They want certainty. But the best founders welcome milestone-based structures because they're confident they'll hit the targets.
MISTAKE #6: Throwing Good Money After Bad (Because You Can't Admit the First Check Was a Mistake)
This one kills portfolios.
You invested $500K. The company is struggling. The founder asks for another $500K to "turn things around." You rationalize: "I'm already in for $500K, I can't let that go to zero. I need to protect my investment."
This is the sunk cost fallacy in action. And it will destroy your returns.
How Your IC Fixes This
Your Investment Committee should establish a ruthlessly objective rule for follow-on investments: They require strong prior performance.
The questions they force you to answer:
- Has this company hit the milestones we funded them to achieve?
- Is the same team capable of executing the next phase, or do we have a persistent execution problem?
- If we had $500K to deploy today with zero history, would we invest it in this company, or would we find a better opportunity?
The best use of capital is often to cut your losses early and redeploy into higher-conviction opportunities. Your IC's job is to protect you from the emotional attachment that clouds judgment.
MISTAKE #7: Skipping Legal Review (Because "We Trust Each Other")
This mistake is insidious because it feels like you're being collaborative and relationship-focused. In reality, you're setting yourself up for expensive disputes and unenforceable rights.
I've seen investors lose millions because critical clauses were missing from operating agreements. I've watched families get locked into bad deals because nobody reviewed drag-along and tag-along rights before signing.
How Your IC Fixes This
Your Investment Committee should mandate legal review of every agreement before execution. No exceptions. No "let's just sign this and clean it up later."
Smart ICs go further: They prepare initial contract drafts. Why? Because the party that drafts the document controls the baseline terms. The other side might not scrutinize every clause the way you would if you were reviewing their draft.
Key provisions your IC should require in every direct deal:
- Clear governance and decision rights
- Liquidation preferences and participation terms
- Anti-dilution protection
- Information and inspection rights
- Board composition and voting thresholds
- Transfer restrictions and rights of first refusal
- Dispute resolution mechanisms
Legal review isn't expensive. Legal cleanup after a blown deal is catastrophic.
Your Investment Committee Is Your Competitive Advantage
Here's what I want you to understand: An Investment Committee isn't bureaucracy. It's your insurance policy against the seven mistakes that destroy direct deal portfolios.
The best investors I work with don't resent their IC. They're grateful for it. Because they know that in moments of excitement, urgency, or relationship pressure, the IC is the voice of discipline that protects their wealth.
Your IC doesn't say no to opportunity. It says yes to the right opportunities, structured the right way, at the right price, with the right protections.
If you're making direct investments without a formal Investment Committee process, you're operating without a safety net. And eventually, gravity wins.
Want to build an Investment Committee process that protects your capital without killing deal flow? Book 15 minutes with me and I'll show you exactly how to structure IC governance that adds value without adding friction.
Because the difference between winning and losing in direct deals isn't about finding better opportunities. It's about having better systems to evaluate them.
