How to prepare yourself for due diligences by Private Equity or Venture Capital Funds?
It is important to ensure that the startup idea is sound enough, legally, financially and commercially to convince the investors to put in their money. A Due diligence is a comprehensive investigation by the investor into the affairs of your company. This does not mean that the investor is solely responsible for carrying out this investigation.
For Due Diligence, it is important to prepare due diligence binders (i.e. legal and business checklists) as they show readiness to the investor. These also expedite the review procedure. The pitch deck should be specific enough to showcase the products, technology and team to the investors. The investor should be convinced of the large market opportunity. When a potential investor assesses your company, they will want to comprehensively understand your financial, legal, operational, technical and employee affairs. Place yourself in the investor’s shoes and anticipate what they will want to know.
The founders should also respond quickly to the changes requested by the investor during the assessment. The queries of an investor should be addressed immediately and also be conveyed to the other investors. This is primarily because the investors can have similar doubts and updating them timely shows founder’s interest to rectify. These measures also facilitate trust building and confidence.
The founder should be sure of approaching investors that will be willing to invest in the founder’s sector including their geography. Thus it is essential to specify the sector. Also, the stage of the company (i.e. whether it is looking for series A funding or beyond) should be mentioned. This would help the investor to analyse the stage of development of the startup and their viability to come in.
The investor during due diligence would want to review financial statements, assess reasonability, review the charter, bylaws, material contracts, the related party transactions, any pending claims or bankruptcy, essential intellectual property, sexual harassment charges on founders to access reputation, capital structure, prior investments, analyse competitors and ensure that there is a confirmation that appropriate confidentiality and invention assignment agreements have been signed by everyone required. The founders should therefore be abreast enough with all the information on the startup that will help answer the questionnaire which shall be put forward by the investor.