Fundraising is a journey, and understanding its steps is crucial for success. One of the most critical steps in this process is due diligence, which prepares you for productive discussions with angel investors and venture capital funds.
Having worked with thousands of startups, I’ve found that many founders are often unprepared for due diligence. They rely on a polished pitch deck, add some information, and hope to capture investors’ interest.
However, this approach often falls short. As a startup founder, you must understand what due diligence involves and how investors think. Due diligence is an in-depth analysis performed by investors to evaluate a startup’s potential, focusing on the product, team, and financials.
The objective is to determine if the startup aligns with the investor’s criteria and investment thesis. For early-stage companies, especially those in the pre-revenue or early revenue stage, showcasing team capability and product potential is crucial. Since demonstrating traction or significant revenue might be challenging, thorough due diligence preparation signals to investors that you are serious and seek a genuine partnership rather than just financial backing.
How to Prepare for Due Diligence:
1. Organize Documentation:Â Â Â – Ensure all company documents are well-organised and categorised. Create folders such as Bylaws, Financials, and Business-related (value proposition, business model, product, team). Keep all files up to date.
2. Set Up Access Levels:Â Â – Create different stages of access for potential investors. For example, Level One could include basic information like the pitch deck or one-pager and team description. Level Two could provide more detailed information, such as the business model, go-to-market strategy, and financials. Ensure all files are current.
3. Prepare Your Team:Â Â – Go through a due diligence checklist with your product team and address any potential issues before granting access to investors. Conduct a “murder board” session, where you anticipate tough questions investors might ask and prepare thorough answers.
4. Provide Evidence of Traction and Product-Market Fit:Â Â – This step is crucial and often overlooked. Understand your customers deeply to deliver a product that meets their needs. Show evidence of traction and how your product fits the market.
The same thorough preparation applies when working with consultants. Ensure your company has a proper data room ready. More on this will be covered in an upcoming post. By meticulously preparing for due diligence, you demonstrate professionalism and commitment, increasing your chances of securing investment and building a successful partnership.