Due Diligence Checklist. How startups should prepare for Due Diligence?

Your company happened to be in a “sweet spot” of an investor’s strategic preferences? Congratulations, now there’s 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 (a.k.a. flags), and explain, and where extra value can be created.

“The recipe for impressing investors: make something worth investing in; understand why it’s 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 company’s documentation and making sure that all founders can answer investors’ questions, you might also want to pay attention to:

  • Your existing and churned customers. How satisfied are your customers and what are the experiences that a potential investor can hear from them?
  • Your ecosystem partners and fellow founders’ network. What are your reputation and brand image among peers?
  • Your tech product. What is your product is actually capable of and how does it perform once tested?

This helps investors to draw an overall picture and to proof check how accurately did founders represent the image of their business.

Due Diligence Checklist. What should be prepared?

To initiate the due diligence process, investors have acquired the common practice of creating a “data room” where the crucial information about your company is kept and reviewed.

Despite some differences in handling diligence, your potential investor conducts a proper review to fully understand your business before making an investment decision. Therefore, you will be requested to provide the documentation about:

  • Management, Personnel, and Organization
  • Market and Competition
  • Business Overview
  • Product
  • Intellectual Property
  • Product technology
  • Scalability of the Product
  • Legal documentation
  • Financial Plan
  • Executive Summary

Investment rounds are effort- and time-consuming, so preparing these documents beforehand will allow you to save more time when your due diligence process is in the full swing.

Overall, investors are handling an in-depth review of your company to understand your case better with all positives and negatives; and the best way for you to go through it is to avoid having “surprises”.

Having long-term objectives and making sure that all things are mentioned to your potential investor beforehand will allow you to avoid an unpredictable reveal of the hidden issues and receive your awaited investment.

Download the full Due Diligence Checklist

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