Due diligence can be a key stage of the fundraising process. Investors may scrutinize every aspect of your business before deciding to back you with their capital. While demanding, due diligence can serve an important purpose – helping investors to assess risk and upside before investing.

What is Due Diligence?

At its core, due diligence is all about an investor gaining a comprehensive understanding of your startup through documentation, data, and discussions. They may want to verify the key assumptions underlying your business model, vision, and financial projections. A thorough due diligence process can benefit both parties by setting clear expectations and surfacing potential red flags before money changes hands.

What Can Founders Expect from Due Diligence?

What exactly can startup founders expect when undergoing the due diligence process with prospective investors? What should you have ready to make the process as smooth and credible as possible? Some key elements to consider include:

Requested Information and Documents

Investors may ask you to furnish a wide range of information and documents about your startup’s business, product, team, intellectual property, legal/corporate matters, finances, and more. While some investors may dive deeper than others, it’s wise to have the following materials ready:

• Business plan and investor pitch deck
• Product requirements, roadmaps, and technical documentation
• Customer stats, sales pipeline numbers, and user metrics
• Competitive analysis and market research
• Info on founders and key team members
• Cap table, stock records, and list of all existing shareholders
• Financial statements, projections, and any existing investment details
• Legal docs like incorporation papers, contracts, etc.
• Patent/trademark information if applicable

The more organized and transparent you are in providing these materials upfront, the smoother you could help make the diligence process. Founders could plan to host a secure data room ready with everything filed neatly. That said, expect ongoing requests for clarification or additional info as the investor digs in.

Customer/Partner Discussions

In addition to documentation, investors may want to speak with select customers, partners, advisors or others substantively involved with your startup. The goal may be to get impartial, on-the-ground validation of your product/service resonance and viability.

Be prepared to provide contacts the investor can reach out to confidentially. Prime them that they may receive outreach as part of diligence. The specific individuals can vary based on your company, but investors may want perspectives from the following:

• Key customers (especially early evangelists)
• Any strategic partners or distribution channels
• Subject matter experts or advisors in your industry
• Prior investors or directors if applicable

A warm intro laying out the diligence context can go a long way in facilitating cooperative, thoughtful responses from your contacts.

Founder/Team Interviews

Of course, no due diligence process would be complete without in-depth interviews with the founders and leadership team. Investors may use these discussions to assess overall capability, commitment, cohesion, and cultural fit.

Come prepared to walk through your pitch but expect a level of scrutiny you may not have experienced before. Investors may probe assumptions, pressure-test your strategies, and explore contingency plans. Tough questions could include:

• Unit economics and scalability of your business model
• Intellectual property and technical risks
• Competitive threats and potential disruption
• Candidate use of funds and growth plan
• Founder backgrounds, motivations, and expectations

One key point is being able to discuss your vision, plans, and risks in a consistently authentic way. Know your materials cold, but avoid over-rehearsed answers that feel canned. Cultural fit can matter, so let your passion shine while maintaining professionalism.

Site Visits and Facility Tours

Depending on the stage and situation, some investors may want an up-close look at your startup’s operations and facilities. This could involve a tour of your office, visits to stores/production sites, or observing team meetings.

The main purpose could be to validate that you truly have the capabilities, processes, and execution potential you’ve outlined. It’s a chance for investors to experience your culture and team dynamics first-hand. Prepare employees for the possibility of investors dropping by unannounced. A polished, seamless experience can leave a lasting positive impression.

Due Diligence Costs (For the Startup)

Unfortunately, facilitating the due diligence process is usually not free for entrepreneurs. There are some out-of-pocket costs startups may need to account for:

• Legal fees for lawyers to process requests and vet documents
• Third-party fees for background checks, audits, valuations, etc.
• Travel costs if you need to visit the investor’s offices
• Lost opportunity cost from time spent away from the business

Final Thoughts

Navigating due diligence may feel overwhelming, but it can be a critical checkpoint on the way to securing venture funding. The thoroughness exists to help guide both the investor’s capital and the founder’s efforts.

From the startup’s perspective, view due diligence as the opportunity to prove out the narrative you’ve crafted. The documentation, data points, and insights gathered can comprehensively tell the story of your company’s growth potential. If you’ve built a fundamentally strong business, have all your materials in order, and can speak authentically to the vision, due diligence can be navigated successfully.

By being cooperative, responsive, and professional throughout the process, you may build a valuable reputation as well. An investor’s diligence experience speaks volumes about what it will be like to actually work with you going forward. Coming out of it with an investor’s trust and confidence intact could be a major win toward securing their investment.

MicroVentures’ Due Diligence

Want to make the due diligence process seamless? MicroVentures helps startups raising on our platform collect all the necessary documentation investors may want to review when conducting due diligence.

Is your startup looking to raise capital? Apply today to raise funding with MicroVentures!

Want to learn more about what investors may be looking for during due diligence? Check out the following MicroVentures blogs to learn more:

• From Insight to Investment: Early-Stage Due Diligence
• The Art of Due Diligence
• Due Diligence Basics for Startup Investors
• Balancing Act: Mitigating Risk in Venture Capital
• Navigating Early-Stage Investing: Mitigating Risks

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.