If you are looking to raise money, your young business will be looked at very carefully. Due diligence is usually thorough, distracting and exhausting. As one founder said to me ‘the questions can make you feel like a fraudulent criminal’. You need to prepare well. Another founder told me that he felt you should ‘run your company as if you are always about to go into due diligence’. It is very good advice.
Due diligence is an extended interview, and every single thing you do and say through this period is noted and used as part of the case for giving you the investment you want – or not.
From the start of your business, employ good governance, behave like a proper business. Have minuted board meetings. Produce back up paperwork to major decisions and put them in a data room with all other important documents. Keep adding as the company grows. It is much easier with electronic storage and will save so much time. Spread the load across the team and don’t run out of energy in the diligence process. That is where you will meet hard and company defining negotiation.
Don’t take things personally and don’t create too much friction with the investor, no matter how hard that might be. Be prepared for an attempted re-negotiation somewhere in the due diligence process.
All aboard the Money Train: Be ready for due diligence
▶ Run your business from day one as if you are always about to go into due diligence.
▶ Set up a virtual data room from day one.
▶ Know your business well, and show that you know your business well.
▶ Be prepared for an emotional and physical rollercoaster ride.
▶ You are probably not a criminal, but the questioning will make you feel like one. Do not react.
▶ Remember that due diligence is an extended interview and that every conversation is part of that interview.
▶ Do not underestimate the effort required, in both depth and duration. Try to put a time limit on the process.
▶ Push back if the demands are unreasonable or ridiculous. Investors can be lazy.
▶ Never lie in due diligence; it will be exposed.
▶ Try not to tie up all of the company management in due diligence. It’s very distracting. Appoint a due diligence ‘lead’.