The different levels of due diligence required at various fundraising stages, from pre-seed to Series B and beyond.
The different levels of due diligence required at various fundraising stages, from pre-seed to Series B and beyond. It highlights what investors will focus on at each stage, including the founder, pitch decks, revenue, technology, and customer validation.
In terms of graduating through the ranks when it comes to the due diligence, at a pre-seed level, they’re going to want to do some due diligence on you, maybe speak with people that have worked with you, and things like that. At a pre-seed level, it’s all about you. When you mature to a seed level, then they’re going to want to see pitch decks, any roadmap that you have, and again, it’s all about the future and the possibility that you are presenting to them. When you go to a Series A level, at this point, you already have some type of revenue, and there’s validation on your product/market fit. Here, they’re going to want to take a look at the technology, also the distribution that you have, maybe speak with some of your customers, maybe with some of your other investors, and perhaps with some of your employees. When you continue to graduate, and you go to a Series B and beyond, it’s
going to be more of the same. But again, those are going to be areas where they’re going to be focusing as a whole, which are going to be all about the team, they’re going to be all about your technology, and they’re going to be all about your business. In terms of how to make the due diligence a little bit easier, you never want to be the bottleneck. Essentially, what you want to do is, even before you think they’re going to be getting a term sheet, what you want to do is have all the due diligence already done upfront. Make sure that you have a folder on Dropbox or maybe on Google Drive, where you put all the documents that are required. And, by the way, below is a link to an article that I published where you can go through all the different checks on what’s going to go into that folder. But to give you an idea, these are the documents that you will put on the due diligence folder.
First, it’s going to be documents with regard to the organization, 2) The capitalization and security holders’ documents, 3) Financial statements and audits, 4) Taxes, 5) Employee salaries and labor disputes, 6) Employment policies, 7) Financial commitments, 8) Consents, 9) Permits and licenses, 10) Insurance, 11) Litigation, 12) Intellectual property, 13) Property plan and equipment, 14) Environmental matters, 15) Other contracts, as well as 16) Miscellaneous. Then, also setting up expectations is critical. When you’re going through the due diligence process, you want to know how long do they typically conduct the due diligence process and what is their exact process because maybe every single investor or any single institution, or perhaps company that you’re speaking with, they have a different type of process, different individuals that are involved, and you want to get clear as to
what’s going to be the timing and the timeline of that due diligence in order to really happen. Remember that this is a team effort. You’re going to need at least one or two individuals of your team, and ideally, you are supervising it if you’re the CEO and the founder, essentially looking at all the different documents and everything that is said. Due diligence is stressful, and you’re going to need to have a plan to deal with it. In many instances, it can take days. It can be like being in rooms, in board rooms, or whatever that is, in conference rooms with all of the investors or with the parties that represent the company that is looking to acquire you, so it can get really stressful. For that reason, you need to exercise, you need to take care of yourself, and that’s going to be a really big one so that you also, when you get super stressed out, just get out of that room, turn off
your computer, and go do something else so that you don’t do anything stupid.