Due Diligence

What is Due Diligence (for a startup)

Due diligence for startups refers to conducting a thorough investigation and analysis of a startup company's business operations, financials, legal status, intellectual property, and other relevant aspects before making an investment or partnership. The goal is to identify potential risks, opportunities, and other factors that may affect the success of the investment or partnership opportunity.

Why is Due Diligence important for Startups?

The due diligence process is essential for startups because it helps establish credibility and build trust with potential investors or partners. It also allows startups to identify and address issues that could impact their ability to secure funding or form partnerships.

What are the 3 principles of due diligence?

• Investigation: To identify any potential risks that could negatively impact the value of the startup and its future growth.
• Verification: To confirm the accuracy of the information provided by the company in order to validate the investigative findings.
• Disclosure: To share any potential issues or risks identified during the investigation and verification processes with all parties involved in the investment or partnership opportunity. 

What are the three 3 types of diligence for startups

• Financial due diligence audits a company's financial statements and books to confirm no irregularities exist and that the startup is on solid financial footing.
• Legal due diligence assesses a startup’s legal, regulatory, and compliance situation, covering everything from pending litigation and intellectual property rights to confirming the company was incorporated properly.
• Technical due diligence is a comprehensive analysis and review of the technical condition of the product or service your startup develops.

What will investors most carefully review during due diligence? 

• Business Plan and Market Opportunity: A startup should have a clear and well-thought-out business plan that outlines its mission, target market, competitive landscape, growth strategy, and financial projections. It should be grounded in a comprehensive understanding of the market opportunity and a realistic assessment of the company's ability to capture market share.
• Financials: A startup's financials will undergo scrutiny to ensure the company has a viable business model and a clear path to profitability. This would include an analysis of revenue streams, cash flow, burn rate, and expenses.
• Legal and Regulatory Compliance: Investors will thoroughly review a startup's legal and regulatory compliance, including its corporate structure, intellectual property portfolio, contracts, and potential liabilities or risks.
• Management Team and Talent: The management team of a startup is critical to its success. As such, investors will assess the founding team's experience, skills, and track record and the company's ability to attract and retain top talent.

What is a due diligence checklist?

A due diligence checklist is an organizational method for analyzing a company that includes areas like ownership structure, assets and operations, financial ratios, shareholder value, processes and policies, future growth potential, management, and human resources.

What are the key roles in due diligence?

• Financial Analyst: A financial analyst reviews the startup's financial statements, such as balance sheets, income statements, cash flow statements, and other financial reports to assess the startup's financial health and identify any financial risks or discrepancies.
• Legal Expert: A legal expert reviews the startup's legal documents, such as contracts, licenses, patents, and other legal agreements, to identify potential legal issues or liabilities that may affect the startup's operations or financial performance.
• Technical Expert: A technical expert evaluates the startup's technology and intellectual property assets to assess the startup's technology infrastructure, software, and hardware systems and evaluate the strength of the startup's IP portfolio.
• Market Analyst: A market analyst researches the market size, competition, and growth potential of the startup's products or services to identify market trends or changes that may affect the startup's business strategy.
• Ops Expert: An operational expert evaluates the startup's operations, processes, and management team to assess the effectiveness of the startup's management team, gauge the startup's organizational structure, and identify operational risks or challenges.
• HR Specialist: A human resource specialist assesses the startup's HR policies and practices to evaluate the startup's hiring processes, employee retention strategies, and compensation plans to identify potential HR-related issues that may impact the startup's performance.

How do you conduct startup due diligence?

The due diligence process typically involves reviewing financial statements, business plans, market research, legal documents, and other relevant materials. The process can be conducted by the potential investor or partner or by a third-party service provider hired for this purpose.