What To Expect In Due Diligence

By Joshua Borstein, Ph.D.

5.1 minute read

When looking to raise capital, it’s not uncommon for entrepreneurs to pitch dozens of venture capitalists and angels before finding someone with interest. The reasons for this may vary. Capital is a scarce resource, but angels and VCs also tend to specialize in certain types of businesses and at certain stages of development, which means finding a fit takes time.

The process often starts with a “screening meeting” or introduction meeting, which usually involves walking the investor through your pitch deck. Getting that first meeting can be hard – but VCs are constantly looking for deals and spend a lot of time meeting entrepreneurs and learning about their business, so a first meeting is often possible. If there’s enough interest, there could be a second meeting, generally with additional members of the team who collectively might decide there’s enough interest and fit to take a deeper look. In this case, welcome to diligence.

Diligence is a formal evaluation of the investment opportunity you’re presenting and concludes with a decision on whether or not to invest. Think of it as a deeper dive into all the aspects presented in your pitch deck. What investors want to better understand is:

  • What is the problem you’re trying to solve?
  • How is it being solved today?
  • What is your solution and why is it better than anything else currently on the market?
  • What is your value proposition?
  • How big is the market for your solution?
  • Who are the competitors?
  • What is your go-to-market strategy?
  • Who is on your team?

VCs want to invest in large markets as it’s the only way to rapidly scale a company with the potential for a significant monetary exit.

The length of diligence depends on the organization. Angels can invest on the spot if they choose as it’s their own personal money, but VCs generally have a formal and lengthier process that can last a few weeks to over a month. If you’ve made it to diligence with a VC, here’s what you should expect:

Have a Plan

Investors will want to know how much capital you’re raising, how you’re going to spend it, and what you want to achieve with it. That is, what is the financial plan and what are the milestones you will hit during the funding round such that when the money is spent, you’ll have a great story to tell that will allow you to attract the next round investor (yes, you will need to raise multiple rounds of capital). At JumpStart, we like to see plans that give companies enough runway to last 12-18 months, which is generally the length of time it takes to achieve milestones. Though there are no set amounts, at the Seed Stage, it is not uncommon for companies to raise $1-2M to get that 12-18 month runway.

Get Your Data Room in Order

As part of diligence, investors will usually ask for a data room that contains important documents that investors will use to better understand the opportunity. Data rooms usually include information related to market and competition, customers and pipeline, corporate matters, executive summaries, and financial matters. Generally speaking, the more information you can provide in your data room, the easier and quicker it will be for an investor to learn what they need and make a timely decision.

Expect to Give Some Time – But Not Too Much

The diligence process mostly takes time on the part of the investor but will require some time on the part of the entrepreneur as well. At JumpStart, we ask for a few hours of an entrepreneur’s time to better understand facets of the business and to get to know the team. That said, we understand entrepreneurs are busy running startups and take as little time as possible.

In the End, It’s a Partnership

If there’s interest to invest, and if the entrepreneur does not have a company-led term sheet or term sheet from another investor, the VC will present one with terms that in the end, should be agreeable to both VC and founders. Negotiation is expected, but finding the sweet spot where both parties can feel fully invested and mutually aligned is paramount. After all, diligence is not the end of a process but the beginning of a long partnership. But that’s a story for another blog.

Due diligence can be a long process but it is a necessary measure to ensure the best chances for success for all parties involved.

About the Author: Joshua Borstein, Ph.D.

Josh connects early-stage technology companies with entrepreneurial resources in Northeast Ohio and performs due diligence on companies seeking capital from funds managed by JumpStart.

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