Yes, due diligence is absolutely essential to fundraising. The due diligence investigation is somewhat akin to test driving a car before making the purchase and driving off of the lot with the new vehicle. No one in their right mind, billionaire or not, is going to plop down money for something about which they do not know anything. And, this is more true than ever considering that we are living in the age of information, with people wanting to know everything about anything and willing to spend hours perusing the countless webpages with troves of information to find out more about it, whatever it may be.
Clearly, the internet has made even a simple background check a whole lot easier, but due diligence takes snooping to a whole different level. A smart investor will want to review a lot of information, and a smart company will be more than happy to oblige those demands, no matter how invasive or extreme they may seem. Below is a list of the main items that will need to be furnished, but our due diligence checklist provides a more comprehensive overview of the other information that may be requested as well.
Depending on whether a company is undergoing its first round of funding or any subsequent round, prospective investors will want to know what securities have already been issued, if any. Obviously, any such issuances will affect existing and potential investors’ infusion of capital and any future return. Even if a company has not yet issued any stock, any filings related to its intention to do so will more than likely also need to be disclosed. Investors will understandably want to evaluate whether and how a company intends to finance itself through such securities issuances in order to determine whether their own investment is a good bet.
Financing Commitments and Financial Status
In addition to any stocks, bonds, or other equity interests, investors will definitely want to know about a company’s business loans or other debt holdings. Any company that has over-leveraged itself is sure to put off a lot of potential investors, especially if it is still in the early stages and has not yet demonstrated an effective business model. Granted, this may seem tricky as fundraising will likely provide the capital needed to grow the business and get those debts under control, but finding an investor willing to take on that risk will no doubt be a bit difficult. Besides mandating transparency with respect to financing commitments, understanding the company’s overall financial status will be of the utmost importance. This will mean providing investors with accurate and understandable financial statements, balance sheets, budgets, forecasts, and so on.
It is fairly routine for companies to enter into contracts, and it is all too common for business contracts to go sour. The potential fallout of any such contract breach could have pretty significant consequences for a company’s bank account, so investors will almost certainly want to scrutinize these existing deals. Obviously, there are plenty of benign contractual arrangements that will not raise any red flags, but contracts with overseas partners or companies with any past shady dealings will almost certainly cause investors to hesitate. Regardless of what any partnerships or contracts may do to a potential investment, it is imperative to be completely forthright, as a subsequent breach may result in multiple, costly lawsuits.
Just as investors will want to know about relationships with external parties, they are also going to be interested in the internal workings of the business, especially the company’s employees. For most investors, the primary concern is that a business is run efficiently with as lean a budget as possible, and sometimes it is employment issues that result in unnecessary cost leakage. Although downsizing and layoffs will not necessarily be the solution, figuring out how to operate effectively on less is more likely to entice investors.
This may seem like an overwhelming amount of information, but gathering this data and presenting it in a coherent fashion simply requires preparation and organization. All of this information should be documented, captured, and organized from the moment a company is founded, something that is easily accomplished with a virtual data room. Rather than view this as a nuisance, companies should view it as an opportunity to get and remain organized.