Startup Investment Due Diligence Checklist

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Due Diligence 101 for Startup Investors (Part 2) – 5T Screening Checklist | Crowdwise Academy (313)

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Financial And Capital Assets

An insightful analysis of the historical data of the targeted company, such as audited financial statements, healthy cash flows, and profitability, is always recommended while buying a startup. Checking off this crucial set of data from your startup investment due diligence checklist answers some critical questions about your purchase.

Existing And Former Products

  • Provide detailed product documentation that includes feature descriptions, architecture and design, technical performance specifications and other relevant detail. Where applicable, give specific attention to demonstrated capability of the product or solution describe the characteristics of the largest product deployment.
  • List all current products and explain how long they have been available and what the evolution of features and timeline has been.
  • List all products that have been de-emphasized or discontinued in each of the past 3 years and explain the rationale for the action. Indicate if the former product was replaced by a newer product.
  • Provide strengths/weaknesses table for each product from a technology and competitive viewpoint and indicate plans and timelines to address shortcomings where appropriate.
  • List of all 3rd party and open source dependencies and indicate IP right to use status.
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    When Does Due Diligence Happen

    Once you have received a term sheet and have both signed it, due diligence commences. There will be a clause in the term sheet under conditions to closing requiring due diligence to happen before you sign the definitive documents and get cash in your bank account.

    The plain English version of this clause from Passion Capital is:

    Before we sign the paperwork and transfer our money, we have to do some basic due diligence on the company and also on you, the founders. This includes anti-money laundering checks and having you complete a Founders Questionnaire. We also want to see that all of the companys relevant employees and freelancers have signed employment or similar contracts which make it clear that the company owns all of the intellectual property thats been created for the business youre building.

    After signing the term sheet your investors will likely advise you the next steps that are needed to be done. They make intros to people whom you need to engage with and possible assign a point person to lead the exercise .

    You arent getting any cash until due diligence is done, so make sure you are on top of all this.

    A Solid Business Plan

    Startup Investment Due Diligence Checklist

    A solid business plan should align goals with time-frames and be based on comprehensive research along with the data sources for easy reference. Question the founder about the flexibility of the plan. What happens if sales are 10% lower than predicted? What if customer attrition is 30% higher?

    While directed at entrepreneurs, you could use this article to find potential holes in a business plan and ask all the right questions. These are the eight things business plans should be able to tell you about:

    • 1

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    Are You Ready To Tackle The Due Diligence Process Head

    While one venture capital groups due diligence checklist might differ from anothers, having your companys paperwork and documentation buttoned up can ensure a successful and headache-free process.

    Fortunately, smart finance software puts all the information you need right at your fingertips, so you can stop digging through paperwork in your desk drawer. ScaleFactors Business Insights, Cash Vision, and Tax Compliance tools are just a few features to help you pass the due diligence checklist with flying colors. Request a demo with ScaleFactor today to learn how its software can help you keep track of the stuff that matterswithout all the hassle.

    A Comprehensive Due Diligence Checklist

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

    • Regulatory and Antitrust concerns.
    • Outsourced professionals paid by the task done.
    • Publicity.
    • Intellectual Property consisting of copyrights, trademarks, trade secrets and patterns.
    • Management, Employees and benefits.

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    Financial Due Diligence Checklist For Venture Capital Private Equity And M& a Transactions

    Completing due diligence is an essential but exhaustive process that can be overwhelming to track and manage. It also differs based on what youre trying to accomplish. If youre doing buy-side due diligence and looking to acquire another company, you would evaluate certain aspects of a business differently than a venture capital firm thats making a minority investment. Investing in a company is also a different process than committing capital to a fund, but should still be thoroughly vetted.

    Ultimately, the benefits of a proper due diligence investigation are avoiding risk and making a prosperous business decision. Even though every process will be different, our due diligence checklist can be plugged into existing workflows, ensuring that you capture key pieces of information.

    To understand the big picture, heres a few details youll need to know:

    A summary of the targets financial history, series terms, cap tables, revenue figures and cash flow
    A summary of debt obligations, agreements or arrangements that are expected to result in a loss to the target
    A report on the targets credit, performance bonds or performance guarantees
    A summary of the targets inventory costing system and other procedures and policies
    A copy of recent bank reconciliations and bank statements
    A comps analysis of similar companies and industry trends
    A description of the targets internal control procedures
    A list of the targets account receivable and accounts payable

    Prepare To Address Material Risks

    Due Diligence 101 for Startup Investors (Part 1) – Overview – CrowdWise Academy (312)

    Investors are often sold on the potential of your product or service. The due diligence process allows investors to evaluate risks that could prevent that potential from becoming a reality.

    Material risks are those that could cause your business to fail. For example, if youve pitched a new search engine, the biggest risk to your company is likely the . If your search engine is a worthy investment, how has Google not already created something similar? Can Google easily replicate your search engine? How will you market against it?

    Know your risks and be prepared to discuss them before you begin due diligence. Have a document prepared outlining how your business will mitigate or overcome material risks. Dont sit back and hope your investors wont question any material risks. These will likely be their biggest concerns through due diligence.

    Theres a lot to keep in your head when preparing for due diligence. How do you do it? Dont rely on your memory or plan to respond to investor requests as they come. Lean on a due diligence checklist instead.

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    Due Diligence Checklist How Startups Should Prepare For Due Diligence

    Your company happened to be in a sweet spot of an investors strategic preferences? Congratulations, now theres a high chance the investor would want to review your company in-depth and request due diligence. At this time, you will open books, and tell the full story of your company. Help your potential investor to understand how your business really works, what is an actual current state, be open about risks , and explain, and where extra value can be created.

    The recipe for impressing investors: make something worth investing in understand why its worth investing in explain that clearly.Paul Graham, co-founder of Y Combinator

    So, you successfully led your initial discussions and pitched your company to a potential investor what comes next? Every investor handles due diligence differently, and the number of differences only grows when given a startup stage.

    Startups should be prepared for due diligence beforehand. Apply best-practice standards to rest assured everything will be great.

    What to expect from the due diligence process?

    The risk of a potential investor and the flow of your due diligence process depend on the price. If the price sits well with the level of risks that comes with your deal, the due diligence is simpler. However, the bigger price the more complicated diligence you get.

    Apart from preparing the companys documentation and making sure that all founders can answer investors questions, you might also want to pay attention to:

    What Is A Due Diligence Example

    Examples of due diligence can be found in many areas of our daily lives. For example, conducting a property inspection before completing a purchase to assess the risk of the investment, an acquiring company that examines a target firm before completing a merger or acquisition, and an employer performing a background check on a potential recruit.

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    How To Use The Dataroom In Process

    Cool, so you are all set up. Assuming you have VCs doing DD you want to share the dataroom with them .

  • Check you havent put anything bad in the room
  • Check you have the template in the root and it makes sense and is up to date
  • Check the naming convention of folders matches the due diligence checklist
  • Ask your VC for a list of names and emails of people who need access to the dataroom. This is typically going to be about 3 principals and maybe a few advisory people such as lawyers and accountants
  • Ask your VC if advisory people have an NDA with their firm before giving them access. That agreement typically applies to all deals they work on like a blanket
  • Provide access to the folder by sharing the link. Do this for the root folder
  • Send your point person and CC everyone else you provided access, that they now have access. Be a pro and communicative
  • If you get a request for more information, add it to the dataroom. Again, email the point person to say the information has been provided and point them to the right folder so they dont waste time
  • When VCs bow out, make sure to remove their access
  • At the end of the process remove access
  • Why Is Due Diligence Different For Early Stage Companies

    Startup Investment Due Diligence Checklist

    Any sort of institutional or corporate investment requires sophisticated and extensive DD.

    Investment institutions tend to invest in companies who are well past the proof-of-concept and early growth stages. As such, they can examine substantive data in their assessment and check its validity. They also need to check it so that they can justify the investment to their own shareholders.

    Its only when a company has achieved a certain level of tangible traction that you can reasonably run analytics on it in the hope of predicting the eventual outcome and the risks involved. The later stage the company, the more data, the more due diligence, the more predictable the outcome.

    Early-stage companies accepting investment from private investors tend to have less tangible evidence available for checking because the company simply hasnt been operating long enough. This means that the checks an angel investor carries out are mostly formulaic.

    Due diligence at the level of early-stage investments is predominantly about checking the claims of the company in their documents.

    This does not mean you should carry out minimal DD. Evidence suggests that investors who spend longer on DD get higher returns ).

    Correlation or causation, it doesnt really matter. You should carry out thorough due diligence.

    They think like this because they have the expectation that their DD ought to be as rigorous and detailed as that carried out by a private equity firm, for example.

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    Ability As A Team Leader

    How do you recognize a great team leader?

    From past experience it should be obvious whether someone has the ability to lead or not. If the startup already has an office you can go and see the leadership in action. This article on Entrepreneur weighs in on the 10 most important qualities for a good team leader.

    Some of the most successful firms in history have been led by entrepreneurial leaders, such as Apple, Microsoft, Facebook and Virgin. Forbes cites ‘dissatisfaction with the present’ as one of the five most important qualities for an entrepreneurial leader, as well as someone who knows how to point out and exploit the firm’s unfair advantages.

    What Exactly Is Due Diligence

    7 Due Diligence Land Mines That Kill VC Deals | Dose 046

    At its simplest, due diligence is an investigation to collect critical financial informationand its one of the most important workflows for any investment professional. The due diligence process will explore and confirm details of a company in an effort to uncover and mitigate potential risks in an investment decision.

    Not only will the due diligence process lead an investor or buyer to pursue or drop a deal, it will lay the foundation for structuring the deal if you decide to move forward.

    Making an investment decision, whether its committing capital to a fund or company, and assessing the potential risks of that investment rely heavily on having accurate information. Good due diligence will evaluate the many risk factors that pertain to an investment. Proper due diligence includes investigating the previous and current performance of an entity, as well as the market, to gauge future growth and potential returns.

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    Basic Company Documents And History

  • Board Resolutions and Reports All signed resolutions of or reports prepared for the Board of Directors or any comparable governing body of the Company, as applicable, and any of their respective committees, including copies of any written notices or waivers thereof.
  • Minutes of all meetings and all signed resolutions of the shareholders, members or partners of the Company, as applicable, including copies of any written notices or waivers thereof.
  • Press Releases For the past three years, all news or press releases issued by or with respect to the Company.
  • Foreign Qualifications List of all domestic and foreign jurisdictions in which the Company maintains an office, owns or leases property, where employees are located, is otherwise qualified to do business as a foreign entity, or is required to be qualified to do business as a foreign entity.
  • Officers and Directors List of current directors and officers of the Company , together with current salaries and bonuses
  • Organizational Charts Internal operational manuals and organization charts.
  • Affiliations Summary of business and personal relationships and affiliations among directors, officers, shareholders, creditors, customers, suppliers and other business affiliates.
  • Communications with Shareholders All reports and any other communications to stockholders.
  • Corporate Documents And Minutes

    To invest in your company, any investor will want to know that your corporation has the right legal structure and is up-to-date with all registrations. For corporate entities, expect to produce your articles of incorporation, letters of good standing, and annual meeting notes. If your company is an LLC, youll likely have to show its incorporation documents and evidence that your company is in good standing with the appropriate government authorities. Your investors are looking to verify that all your corporate forms are in order, avoiding potential fines and someone being able to pierce the corporate veil.

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    Introduction To Ip Due Diligence

    Any due diligence exercise, especially IP due diligence, involves turning over rocks and seeing what is there. Intellectual property is notoriously difficult. IP assets for most companies represent most of the value of a company.

    For startup companies, intellectual property assets represent the potential of the business. Patents, for example, represent the companys potential products.

    For more mature companies, IP assets capture the companys success to date. Patents for a more mature company captures the companys lessons learned from research and development. Similarly, trademarks capture the companys investment in advertising and marketing. Often more valuable, however, are the trade secrets that the company develops in the form of their customer list and customer relationships, as well as the countless lessons of what does not work.

    Intellectual property is difficult to analyze. It is ephemeral and hard to grasp. In certain situations, a patent may be worth billions, but most patents are worthless. The trade secrets are often hiding in plain sight and the CEO might not even recognize them.

    In this post, we will step through a due diligence checklist. The process:

    • Identify the intellectual property
    • Make sure the IP assets are owned by the target company
    • Evaluate the intellectual property for strength and weaknesses
    • Make recommendations regarding the value of the intellectual property

    Standards For Startups To Get Funding

    Startup Investment Due Diligence Checklist

    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 thats 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.

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