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What entrepreneurs can expect during due diligence

Kick starting with capital

In the present business climate, it is very difficult to get a business started without capital – either from the founders themselves, friends and/or family, or outside investors. Most entrepreneurs know that at some point(s), fundraising will be an important part of their role. What many don’t know, however, is what the process is like and what they will have to do for it.

Many complex “things” come along with raising money including legal work, new obligations, and investor relations. Due diligence is one of these things, and it can be a substantial effort requiring a huge amount of time and documentation.

Investors will have different needs

All investors are different, and their due diligence needs all vary too. Friends and family usually need only basic diligence. Professional investors will require significantly more, and all have their own unique set of “hot buttons” that they look for, or extra closely at. Regardless of the variance between investors, entrepreneurs should expect to provide some combination of the below:

  • A strong executive summary and PowerPoint deck is important to get investors hooked, but you are going to need a fully developed business plan to reel them in. Founders will need to speak to all aspects of the plan, and back it up with insight, data and answers.
  • Detailed past and current financials, as well as future projections going out at least three years (quarterly reporting/projections should be fine). A sophisticated revenue model that can be backed up by industry data, and that also includes expense projections at a fairly granular level, should back up the projections.
  • A revenue/profit growth curve that is strong and presents significant upside for investors, but that is also realistic.
  • Verification of market size and trends using multiple independent data sources.
  • Potential investors will likely want to interview a sample of customers, suppliers and strategic partners, and the whole management team.
  • Employment contracts for all key employees. These should include non-compete and Intellectual Property clauses.
  • In-person presentation(s) at company headquarters, and by traveling to investors’ offices.
  • Time. Time for impromptu calls and questions, as well as for scheduled presentations. Time to prepare documentation. Time to think. Time.

There can be more to due diligence, but the above covers a significant amount of the landscape. Once you successfully navigate your potential investors through this process, be prepared for deal terms negotiation. Everything may be up for negotiation here, including valuation, interest rate (for convertible debt), conversion terms/rights (for convertible debt), equity preference, guaranteed return on investment, board of director seats, and approval rights on: annual budgets, large expenses, strategy, key hires/fires, etc.

Yes, raising capital is a daunting process. It takes too much time, too much effort, and is riddled with too many “no thank you” answers. Fundraising is our reality though, and if a company brings in investors who are a good fit, along with enough money to fund the business plan, then it will all be more than worth it.

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Written By

Hoyt David Morgan is an entrepreneur, angel investor and business strategy leader. He is an investor and/or adviser to a handful of exciting and high growth companies, and has been a part of several high-value exits. He is passionate about customer experience, smart business and helping innovative companies grow... and sailing.

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