When you're raising capital for your startup, your potential investors will conduct an assessment of your company’s strengths and weaknesses, known as due diligence. For both the business owner and investor, due diligence is an important part of the investment process: you demonstrate your business’s potential value, and the investor analyzes the risk of their investment.
Startups that want to raise funds from venture capitalists (VCs) have a long road ahead of them and must prepare specific information about their company. Therefore, startups seeking funding from VCs should prepare a due diligence checklist to audit their company and prepare for the first round of funding.
Here's what you need to know about this process and what to include on your checklist.
What is a due diligence checklist?
A due diligence checklist is an organized, comprehensive method VC firms use to fully analyze and understand the inner workings of a business. As part of the due diligence process, investors will request access to important information about the business they want to invest in, such as its inventory, financial numbers, assets, contracts, intellectual property and outstanding legal issues, if any.
[Read: 3 Practical Tips for Attracting Investors]
3 examples of VC due diligence checklists
VCs will carefully consider every aspect of the business before investing in it, so the more information you can provide about your business, the better chance you will have in attracting an investor.
These three due diligence checklist examples will help you prepare your business for VCs and, hopefully, lead to a successful outcome.
For a comprehensive list: UpCounsel
UpCounsel, an online marketplace for legal services, provides a comprehensive due diligence checklist that is broken into 19 categories:
- Antitrust and regulatory issues.
- Information technology concerns.
- Publicity.
- Outsourced professionals.
- Insurance coverage.
- Litigation.
- Products and services.
- Customer information.
- Tax information.
- Material contracts.
- Licenses and permits.
- Environmental issues.
- Real estate.
- Physical assets.
- Intellectual property (trade secrets, copyrights, patterns, trademarks).
- Employees and benefits.
- Organization and good standing of company.
- Financial information.
- Revenue streams.
Each category includes a list of steps with different moving parts and provides a helpful overview of what VCs look for. This is one of the most comprehensive due diligence checklists that covers most, if not all, the bases.
Startups that want to raise funds from venture capitalists (VCs) have a long road ahead of them and must prepare specific information about their company.
For a streamlined list: 50Folds
50Folds, founded by startup mentor, Alexander Jarvis, offers a different take on the due diligence checklist with a more streamlined list:
- Historical financials.
- Business model/financial projections.
- General legal, corporate, and compliance matters.
- General overview of assets.
- Materials, contracts, negotiations, and arrangements.
- Employees.
- Intellectual property.
- Insurance.
- Compliance with statuses and regulations.
- Litigation.
- Technology.
- Other.
The checklist is available as a free Excel download that you can use to answer questions including (1) if the audited financial statements from the last three fiscal years are applicable; (2) if the structure chart of the entire company (including subsidiaries, associated companies, branch, equity investments, etc.) apply; and (3) details of any material adverse change in the financial position, prospects or turnover of the company or of any known event or matter which has occurred or is likely to occur.
For a more condensed list: Cooley GO
Cooley GO provides an even tighter sample checklist that you can use to cover your bases. This due diligence checklist is broken into nine primary categories, each with its own smaller list of items you should prepare before seeking funding from a VC.
- Actions and minutes.
- Charter documents.
- Capital stock.
- Legal and regulatory.
- Intellectual property.
- Management, employees and consultants.
- Debt financing.
- Other agreements.
- Miscellaneous.
Based on these templates, you can decide which due diligence checklist is best for your business or craft your own. Remember, venture capital firms often receive hundreds of requests each month and they will quickly overlook companies that appear disorganized.
[Read: A Guide on Raising Venture Capital Funding]
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