In this article, we’ll talk about when due diligence happens, what the process to Prepare for Due Diligence is, and what mistakes to avoid.

As a startup founder seeking investment, it’s important to be prepared for the due diligence process. Due diligence is the audit process that potential investors undertake before committing to investing in your business. 

The main goal of due diligence is to make sure that everything your claim about your company is true and identify the potential issues that may not have been mentioned in your investment pitch.

When Does Due Diligence Occur?

Due diligence tends to occur after you’ve presented to a venture capitalist firm or angel investor. If they’re interested in your proposition, the natural next step is for them to carry out due diligence on your company. 

Think of it this way, you wouldn’t buy a property without first carrying out a survey to check for potential issues. Angel investors view the investment process in the same way. 

The due diligence process is how they gain assurance in your company.

Informal due diligence starts the moment that an investor engages with a startup. The seemingly casual questions that an investor asks are used to define the company in broad terms. After the term sheet is agreed upon by the startup and the investor, the process can begin in earnest.

The Due Diligence Process

The level of the due diligence process mostly depends on the amount of investment you’re getting. Sometimes, it can be a simple chat after the pitch deck.

At other times, it can be involved lawyers, accountants, and a lot of paperwork. In this case, investors may want to look for the things like your financials & even your personal history.

How to prepare a startup for due diligence

To prepare for due diligence, there are several pieces of information and documents that startup founders should have ready. These include:

Financial Information and Business Plan

Your business plan and financial records are the most common data points investors ask for from you.

Intellectual Property Rights

Investors want to know about your company’s patents, trademarks, and other intellectual property rights to understand its value.

Minutes and Business Documentation

Meeting minutes, contracts, and other business documents may be reviewed by investors to gain insights into your company’s operations and relationships.

Transparency Regarding Lawsuits

Any past or pending lawsuits involving your company should be disclosed to investors, as they can impact financial health and reputation.

Team Interviews and Background Checks

Interviews and background checks on your team may be conducted by investors to assess their capabilities, track record, and potential for success.

Supply Chain Contracts and Customer Data

Information about your suppliers and customers may be reviewed by investors to gain insights into your company’s supply chain and customer relationships.

Revenue and Sales Numbers

Your revenue and sales numbers will be of interest to investors as they assess your company’s financial performance and potential for growth.

Market Analysis

Investors may review information about your target market and competitors to assess your company’s market position and potential for growth.

Founder Diligence

In addition to conducting due diligence on your company, investors may also conduct due diligence on you and your founding team. This is known as “founder diligence” and can involve background checks and interviews with members of your team. 

The goal of founder diligence is for investors to gain a better understanding of the individuals behind the startup and assess their capabilities, track record, and potential for success.

Also Read:- 7 Tips for Creating a Pitch Deck to get your Startup Funded

Common Mistakes to Avoid during the due diligence process 

Some common mistakes can include withholding important information or misrepresenting your business. For example, if your company has hidden debt, a pending lawsuit, or an ethical issue related to your product, it’s important to be upfront about these issues with potential investors. 

Other common mistakes that startups make during the due diligence process include inconsistent terms in agreements, inadequate intellectual property protection, and equity promises without proper documentation.

It’s important, to be honest and transparent with your investors. If you hide or misrepresent information, they’ll likely find out and it could lead to legal problems for you

Conclusion

When investors are thinking about putting money into a startup, they want to be sure they’re making a good decision. That’s where due diligence comes in – by checking out all the important details about your company, investors can feel more confident about their investment.

By being transparent and well-prepared, startups can increase their chances of securing investment.