Regardless of the stage of the startup development stage, a process that takes place during every round of investment, is due diligence, when the (potential) investors take a deeper look into your company’s credentials. Angels or VC-s want to know what they’d be getting into before agreeing to commit financially.
We’ve heard the question many times – what is it, that the investors are looking for in the due diligence process? What should we prepare?
So here is a basic overview, which varies depending on the investor, some have a specific checklist, some involve outsourced experts to make sure everybody wins from the deal, there might be one or more people asking for information. And usually if there is a syndicated investment put together, the Lead Angel takes the due diligence findings and presents them to the syndicate where the decision will be made – to invest or not to invest. Hopefully it will help you to prepare the framework.
- Team.
The most important factor in the companies’ success is said to be the team.
Do you have relevant knowledge in the required field on your team? How motivated and invested are the team members? How good is the team dynamics? How are the roles divided and how much value do the people create?
The investors try to understand whether the team members are on their correct positions and if they are bringing value to the table. Also how invested are they in the company. Founder and core team’s involvement, motivation and also coachability are the key factors here. Include the basic overview of your employees, their experience and strengths. - Proof of traction and market.
The investors are especially keen to find out whether there is a problem on the market and if your solution fits to solve the problem. What/who is your product or service targeted to? How big is the market? Who is your average customer? How high is the customer acquisition cost? Do you have any high value customers? How high is the customer acquisition cost? Who are your competitors? Never say you have none, if a quick search on google would identify them easily. Show the visual proof, it helps to see overview quickly. - Technical framework.Are there any intellectual property rights registered? Might there be any infringement issues arising? What is the technological breakthrough or solution? You don’t have to be the first with the solution, but you do have to show there is need and it is the BEST solution out there. Perhaps you’re approaching the problem from a different angle. Let the investors demo the product/service/app.
- Legal and contractual issues.
Are there any previous investors on board so far? What does the cap table look like? Who has how much ownership and what are the obligations to be filled in the near time future? - Usage of investment and exit strategy.
The investors want to know how their money is used. So be prepared to talk a lot about what you spend, how and where.
What do you plan on using the investment for? What does the budget look like? How long will the runway be? What are your current financial commitments and capabilities? Do you have any previous investors on board with a soft commitment?
What is your likely exit strategy? When would that happen? Are you willing to part with the company you’ve founded?
..etc..
Certainly there are more questions and details to be enclosed, especially if your company is further along but this tends to be the gist of it. So you might be sitting down with the Lead Investor(s) or have more people around the table(or a video conference room), but be prepared to give concise information that is on point and don’t be afraid to ask your questions as well.
Make the data visual, easy to see and understand and be prepared for follow-up questions and more details.
After all, the investment is supposed to be a win-win situation, where the funding round and investors you choose to be on board help to take your company to new heights and investors are happy with the prospect of a return.
We wish you successful fundraising and if you have any questions on how EstBAN operates or how to reach our investors for funding, let us know via info@estban.ee!
