Funded

Chapter 7. Preparing for Due Diligence

You’ve nailed the pitch, and now it’s time to focus on what investors will ask for once you’ve caught their initial interest. In this chapter we will complete your preparation to hit the fundraising trail.

Once an investor has expressed interest in investing in a company, the deal will enter into a due diligence process. “Due diligence” is a term given to the investigation or audit of a potential investment. Throughout the due diligence process, investors look to confirm all material facts in regard to a sale.

Almost all investors conduct at least minimal—and sometimes very extensive—due diligence on the deals they invest in. Investing in early-stage companies is risky, and conducting extensive due diligence can reveal problems with a company’s business early on, allowing investors to identify the key risks associated with the investment. This will allow them to either develop a risk mitigation plan with the company or back out of the investment altogether.

Some investors conduct due diligence prior to issuing a term sheet, a nonbinding agreement used to propose the terms of an investment. However, most investors, especially when participating in more competitive deals, will issue a term sheet and then complete due diligence. For those deals, successful due diligence results in the legal paperwork being drafted and the investment round closing.

For investors, due diligence is a necessary evil. A recent study found that angel investments ...