If you have ever sought or considered investment opportunities for a start-up, you may have come across the term ‘investor due diligence’. If you want to stand a chance of securing funding for your business, you need to ensure you can pass this due diligence to bring investors on board.
Simply put, due diligence is a series of checks that investors make before they commit to financing a company. It aims to make sure they are getting value for their money and not sinking funds into a bad opportunity.
Understanding due diligence and what it encompasses gives you the tools you need to ensure you get through this stage, providing the information you need to and obtaining buy-in from investors.
In this blog, we explain due diligence in detail and the steps you should take to enable your business to tick the right boxes.
What is due diligence?
Due diligence is defined as investigations investors must carry out to determine the value of an opportunity and confirm facts. Essentially, it means investors having to undertake checks that ensure you are who you say you are, your business has value, and there are no hidden skeletons that they should be aware of.
Understandably, investors need to follow due diligence. They are often putting sizeable sums of money into companies, with the expectation that they will receive substantial returns on their investment. If a business turns out to be a sinking ship or does not deliver on the promised success, investors risk losing their money. Due diligence minimises the risk, making committing to a company less of a gamble.
Due diligence will encompass many aspects of a company: company valuation, leadership team, financial projection, business model, market value, competitors and any other risks that may be involved. So, you can expect any pitch you make for investment to undergo scrutiny in these areas, both during the pitch and afterwards, to verify any claims you make.
How to pass due diligence
When considering an opportunity, there are several things an investor is looking for. With the level of scrutiny required, it is in your best interest to provide relevant insight that answers their concerns and confirms the value of the opportunity you are presenting. By doing this, you will increase your chances of engaging investors and securing their backing.
We’ve listed our seven steps to help you get past the due diligence checks.
Be honest and accurate
The first thing to stress ahead of a funding pitch is the need for honesty and accuracy in any claims you make. While it may be tempting to make exaggerated or ‘rose-tinted’ statements in a bid to portray your idea favourably and guarantee support, investors are likely to know when you’re not entirely truthful.
These are often people who have been in the game a long time and are aware when something sounds too good to be true. If they aren’t mindful immediately, they could go on to uncover the truth via their due diligence checks. At this point, you will have lost credibility, making investors much less likely to trust you with their money or believe your ability to run a business.
So, at every stage of the process, be honest – even if it means disclosing potentially unfavourable things. Some investors are open to a certain level of risk in business, but very few will be open to the risk of working with someone who lies or doesn’t understand the reality of their business.
Provide detailed information
When undertaking checks, investors want to see everything they need to know about your business. Thus, it is advised to offer detailed information and insight that answers any questions they may have.
As part of your proposal, you need to provide business plans and financial forecasts. Offer as much information as possible in these areas, covering all the strategies and aspects of your business you believe an investor may want to know about.
While providing this information, you should also make it clear how your respective plans were formed and what assumptions were made. This will reassure investors that it has been done accurately and honestly, offering real insight into your business.
It is vital to draw through your enterprise’s value in each piece of documentation so that the end takeaway is that you are an excellent opportunity. Strike a balance between shining a positive light on yourself while still staying rooted in reality, so you can give a truthful view of your business while still presenting yourself favourably.
Use data to give realistic projections
Whenever you talk about numbers and figures in relation to your company, you need to ensure that your claims are founded on data. This matters especially when offering financial projections and forecasts.
Look at any historical data you may have, such as sales, revenue and overheads, and embed this into your financial documentation to show how you will realistically grow on this over time. If you don’t have this data available, undertake market research and competitor analysis to determine how you might expect your own finances to look. Remember to tell investors what data has been used so they can check the sources themselves if required.
By using real data from either the market or your history, you will be able to create more accurate predictions about your finances. As this will be one of the most significant areas of scrutiny for investors – after all, it proves how they will get their money back – having the data to back up your claims will reassure any concerns they have and convince them of your financial worth.
Show insight into the market and your audience
To understand your value proposition, you need to bring investors on board with the market you sit in and the customers you will target. This includes any niches or market gaps you will fulfil, the customer pain-points you will address, and any industry competitors you need to be aware of (and how you will beat them).
Providing this insight matters for two reasons. Firstly, it dictates your business’s potential, including what level of demand you can expect to see (directly resulting in revenue and profit) and how you will grow over time. Secondly, it shows you to be an expert in your business, with enough understanding of the market to effectively navigate your company to success.
By offering this information, you will convince investors of your position and worth in the market and show a demand for your product or service. This will provide a full picture of the venture, enabling investors to buy into it.
Create an accurate enterprise valuations
Your company valuation is significant because it places a figure on the worth of your business. Investors are highly interested in this because it shows what they are getting for their money, ensuring they only put in a sufficient amount of funding to get the returns they want.
Due to the importance of valuations, you need to ensure these are accurate. Make it clear the basis on which the valuation has been calculated to showcase this accuracy.
Of course, there will be value to your business beyond just figures. So, be sure to highlight this other value and how investors will benefit – such as if you have high growth potential, CSR impact or local community support. While this may be viewed as secondary to the financial aspect, it can encourage investors’ engagement for your broader value and help differentiate you from others.
Provide team insight
Investors rightly want to know about the people behind the business as much as the business itself. These are the people who will be at the company’s helm, leading it to success and through challenges. So, having a strong team is a winning point.
Provide insight about your leadership team to investors, including their roles, skills and prior track record to date that will set them for excellence. However, remember that investors will likely check out your team members after the meeting, so don’t attempt to exaggerate or make untrue claims about anyone.
Similarly, if there are any red flags in the team – such as individuals with previous business mistakes or failures – don’t attempt to gloss over this. Instead, be upfront and talk about lessons learned to show why you have chosen the team you have and why you believe they are the right leaders.
Look to supplement your team, if needs be, with non-executive directors and fill any deemed weaknesses or skills gaps, which may help to bring investors on board.
Be open to questions
By following the steps outlined above, you should have given investors plenty of information to assist their investigations. However, you must be prepared for any questions they have and answer these fully and honestly.
Due diligence can encompass many facets, so it isn’t uncommon for someone to continue to have concerns or queries even after you have pitched. Assuaging these concerns is key to guaranteeing their commitment.
Aim to be helpful and facilitate any requests from investors during the funding process. This might mean providing supporting evidence and documentation for your claims. Don’t be deterred if you receive such requests, either – it shows the investor is considering your proposal seriously and wants to understand your venture better.
ideally, investors would provide you with the funding you need without any questions asked. In the real world, due diligence is an integral part of the process and passing it is a barrier all businesses seeking investment must overcome.
Understanding what an investor needs to know during this stage is the best starting point for passing their investigations. By providing accurate, detailed information and being open to questions, you will offer a proper view of your business and ease any concern an investor may have. Better yet, you will earn their trust and credibility for your venture.
If you need support in creating a funding pitch that incorporates investor due diligence, we can help. Our start-up services aim to increase investment readiness, providing you with the tools you need to go out and secure finance.
Get in touch today to find out how we can help.