Lemon Theory of Due Dilligence

Last week, Bizologie presented at the SLA Texas Chapter meeting of information professionals in Dallas. It was a great program sponsored by Plunkett Research and IEEE. We had the privilege of hearing Dr. David Croson a professor of strategy, entrepreneurship, and business economics at SMU Cox School of Business. Croson is also an angel investor. His research and his presentation, Cashing In On Superior Research In The Startup Economy, both focus on the value of information in decision-making.


Because investors need to move money and make investments, time spent trying to pick only the best companies, or the “cherries” as Croson calls them, can be counter productive. Croson posits it is better to focus on filtering out the lemons and then invest in all the other opportunities that come across the desk. His research supports that that theory pays off.

How do you sort out the lemons? When doing due diligence on companies, go in looking for disconfirming evidence. Play the devil’s advocate and try and find every reason this company could or would fail: Is the industry not growing; Are there huge competitors; Are there unfavorable regulations coming? By intentionally looking for the bad news, you won’t miss something or be inclined to skip over something that seems negative.

Also as Croson points out, it is important to remember the value of research is zero if you don’t plan to make any changes with the information you receive. So when you are presented with the research, be sure that you are taking into account your original intentions and objectives for having sought the research in the first place.