Broadly speaking, there are six key areas of your business that investors most commonly scrutinise:
1. Your people
Venture capital firms, especially those looking to invest in early-stage start-ups, will put the founder/s and management team’s backgrounds under scrutiny. The human element is essential to successful collaboration, and venture capitalists (VCs) will typically want to work with people they believe will fit their vision and personality.
Tip: ensure that valid and binding employment contracts are in place for all key employees.
2. Your financials
You will be asked to provide complete financial records during the process, and this will include the following documents:
- All approved financial statements
- Your latest available financial statements
- Annual tax statement extracts from the register on floating charges
- Annual balance sheets and the latest available balance sheets
- Your profit and loss (P&L) statements
- Your annual budget, including a full breakdown of your expenses and salaries
3. Your product
Start-ups are valuable by virtue of their capacity to disrupt traditional industries through innovation. This focus means that a start-up’s product, and the extent to which its product offering is ground-breaking, could be the reason investors show so much interest in the first place. Not understanding every detail of your own product is a deal-breaker.
4. The market
No person or business functions in a vacuum. Investors will be interested in the viability of the market that you are entering and your overall position in it. They will likely request that you furnish reliable information on the size of the market, barriers to entry, and how much of it you will likely be able to penetrate.
5. Your equity structure
Start-ups generally have complicated ownership structures with myriad co-founders, angels, and early-stage investors, all of whom may have equity. Additionally, the deals you have brokered with such equity holders may contain certain stipulations that will affect how the start-up is viewed in its current stage of funding.
Investors will analyse any deals between the company and previous investors during the due diligence process. They will place a special emphasis on debt, the shareholding structure, and other contractual obligations.
6. Risk management
Investors vary in their appetite for risk. Some may be willing to invest in riskier ventures if the reward could be considerably higher, whereas others may be more wary and only invest in ventures with guaranteed returns. However, both types of investors will place value on companies which have identified potential risks, attempted to mitigate such risks wherever possible and have a comprehensive action plan to deal with such risks, should they arise.
Due diligence is an inevitability when it comes to raising capital or attempting to sell shares in your start-up. It will often play a significant role in an investor’s decision, hence the importance of being properly prepared for the process. It is imperative that you structure your business with investors in mind, ensuring that you have access to all business-related documents and agreements and that you pay attention to detail when entering into contracts and keeping company records. Transparency and a thorough approach will safeguard your success.