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How to Perform Due Diligence for Series B Fundraising

    

If your company has made it to the point that it has to embark upon a Series B fundraising round to take growth to the next level, then the future is likely looking bright for the business. Fundraising becomes increasingly onerous as a company progresses along the sequence of rounds, from seed and angel investments to Series A and then on to Series B. At this juncture, the level of scrutiny intensifies, as the primary focus is on whether a company has the capacity to maintain the momentum that got it to that point in the first place. Even if a company manages to impress prospective investors and lures them into taking the next steps, surviving the due diligence investigation may or may not go as planned. In order to assess whether your company is ready for a Series B fundraising round and will be able to emerge from the due diligence process unscathed, it is important to first ponder these questions:

Is the company credible?

Selling a creative vision may work for seed funding and instilling confidence in the ability to deliver will perhaps get a company through a Series A round, but for Series B fundraising, a company has to demonstrate its credibility. There has to be tangible proof that the business model is working and will continue to work and that the leadership team knows exactly how to steer things forward. As a result, a company has to take a hard look at its existing processes and procedures to determine whether they will pass muster when examined by external eyes during the due diligence investigation.

Is the company reputable?

An examination of a company’s credibility obviously goes to the internal workings of the business and the results that are achieved as a consequence of those processes. Reputation, on the other hand, derives from the way in which customers, clients, and competitors perceive the business. A company may be credible in that it is generating revenue and even turning a profit, but that does not mean that people are happy with the way it is conducting its affairs. Perhaps there is only one firm occupying the space at the moment, but if that single entity is not careful, a competitor can easily come along and replace it. Thus, it is important to know how clients and other relevant players view the business before allowing others to begin judging it.

Is the company profitable?

It is often said that you have to spend money in order to make money, and this is a very delicate balance that is difficult for fledgling companies to find. Nonetheless, in order to demonstrate a workable business model, there has to be something to show for it financially speaking. The numbers do not have to be astronomical, they just have to be there. In addition, it is important to determine how the existing earnings will translate in the future. Clearly, no one has a crystal ball and thus cannot state with any level of certainty how much a company will make in the future, so conservative estimates are always the best way to go. Ultimately, companies must calculate, recalculate, check, and re-check the budget, balance sheet, financial statements, and projections before beginning due diligence.

Are the leaders likable, adaptable, and trustworthy?

Most investors are primarily interested in making money, and you do not have to like someone in order to work with them and make that happen, although it certainly does help. During any round of fundraising, a huge part of the investors’ decision to proceed, whether conscious or subconscious, relates to how much they like or dislike the people who are making the pitch and running the show. The leadership team must exude confidence and integrity to ensure that potential investors feel comfortable entrusting them with their millions.

Fundraising at any stage is not easy and due diligence for each round is usually even worse. No matter how desperate a company is for a cash infusion, it should never rush into a deal until it has done some serious self-reflection to ensure it is really ready to take that leap.

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