Venture Capital Due Diligence

Venture Capital Due Diligence is a comprehensive procedure which will eventually ignite the decision on whether the venture capital fund or other types of investors will infuse liquidity into your startup company.

Due Diligence involves both the asking and the answering of a number of questions which will evaluate the startup and also its economic and legal implications.

There are rigorous investigation and fact finding events that are conducted before a venture capital firm commits any funds.

Standards For Startups To Get Funding

As per records, as few as 10 to 15 percent of startup proposals pass the initial screening phase. The data that have been accumulated in the early stages will set the stage for deeper surgery into the innermost core of the organization through detailed due diligence.

But venture capitalists and investors have personalities of their own, and they also have to define the type of startups which already have a synergy with their existing investments.

Some features which they would look into would be:

  • At what stage of maturity is the business in. Not all investors invest in the initial stage of startups. They could choose to come in from seed, to early or even in the mature stages. It is even possible that they will invest even before the startup is formed because they like the idea so much.
  • The geographic region where it is operating. Most investors prefer to invest when the startup is in a location that’s accessible to them. This is because the company will be easier to inspect from where they reside, especially for spot audits.
  • The size of the investment needed. Venture firms usually commit a minimum and a maximum amount to a startup they fancy. This is to efficiently monitor the disbursement of funds into several startups.
  • The nature of the industry sector. Venture capitalists tend to focus investment on industries that they understand or are experts in.

These features should be well answered and looked into. While the due diligence process is being executed, some red flags could be unearthed. This is where 85 to 90 percent of the business proposals are being rejected.

This initial fact finding will trigger the decision on whether to move on to the next phase of the process wherein valuation and deal structuring will take place.

Not One Universal Due Diligence Process Fits All

The investors can be creative in how to execute the Due Diligence process. Not one approach fits the needs of all venture capitalists because of the continuing specialization of each industry.

The Due Diligence procedure, in whatever form, design or length, is essential to minimize the investors’ chances of risk. That is why it is quite important to thoroughly check the challenges, competition and issues that are deep down in a startup business proposal which are not quite visible, at first glance.

There is a long road ahead for startups to be able to attract funds from venture capitalists. They should be prepared with a Due Diligence checklist which shall be presented to the prospector investors who will bring their auditors to check on the viability of the company. This checklist is especially important so that the first round of funding will commence.

Types Of Due Diligence Checklists

There are different forms of Due Diligence Checklists. Whatever their designs and contents may be, they should have organized and comprehensive methods intrinsic in them which the investors will utilize to fully understand and grasp the feasibility of a startup.

Here are some examples:

A Condensed Due Diligence Checklist

This is a very tight sample checklist which can cover all the bases. There are 9 primary sections which will have their own smaller subsections. It consists of:

  • Actions and Minutes of Meetings.
  • Charter Papers and Documents.
  • Capital Stock.
  • Legal and Regulatory Guidelines.
  • Intellectual Property Ownership.
  • Complete List of Management, Consultants and Employees.
  • Debt Financing and History.
  • All Other Agreements and Contracts.
  • Miscellaneous.

Venture capital firms receive countless inquiries for startup funds every month and this template can make your organization look systematic and efficient, compared to other startups competing for the available investment.

A Streamlined Due Diligence Checklist

Startup mentor Alexander Jarvis, recommends this streamlined checklist which can attract the right investors:

  • Financials History.
  • Financial Projections and Business Model.
  • Overall Corporate, Legal and Compliance Documents.
  • Arrangements, Contracts, Negotiations and Materials.
  • Employees and Management.
  • Intellectual Property within the industry.
  • Insurance Covererage.
  • Compliance with Statutes and Regulations in the Jurisdictions where the Startup does business.
  • Litigation.
  • Technology.
  • Other concerns.

With this template, you could answer questions like:

  • Audited financial statements from the last 3 fiscal periods.
  • If the structural chart at present of the company including its subsidiaries, linked companies, branches, equity holdings will still apply.
  • Give details on any expected substantial effect on the startup’s financial position, when industry events, or economic scenarios occur, or has recently occurred or is expected to happen.

A Comprehensive Due Diligence Checklist

This is a very thorough due diligence checklist that is broken down into 19 sections:

  • Regulatory and Antitrust concerns.
  • Information Technology issues.
  • Outsourced professionals paid by the task done.
  • Publicity.
  • Litigation.
  • Insurance Coverage.
  • Products and Services offered.
  • Customer database.
  • Tax information.
  • Material Contracts and Agreements.
  • Permits and Licenses.
  • Environmental concerns.
  • Real Estate holdings.
  • Physical Assets.
  • Intellectual Property consisting of copyrights, trademarks, trade secrets and patterns.
  • Management, Employees and benefits.
  • Organizational structure and reputation and good standing of the company.
  • Financial Data.
  • Revenue Streams and Resources.

Each section has a subset of steps with various moving parts and is a very insightful overview of what Venture Capitalists look for. This is one of the most thorough Due Diligence checklist which covers every item that is important.

These three types of Due Diligence Checklist models will help your organization prepare for venture capitalists and will hopefully lead to successful funding. Find the effective one that makes all the important aspects of your organization as clear as possible to the investors so that all their questions will be answered to their utmost satisfaction.

Are you looking for startup funding? Contact us. Peak is an early stage venture capital company.