It’s important you do your homework before you invest in something or someone.
If your backing is of a financial nature, it’s crucial.
But even if it isn’t, you should know what you’re in for.
Due diligence is defined as an “investigation, audit or review performed to confirm facts or details of a matter under construction”.
You wouldn’t enter a friendship or relationship these days without doing a Google search or deep dive of Facebook and Instagram, so why should your business partnerships be any different?
While due diligence is associated with investors, it is also important for founders.
Here are our tips for what to look out for.
There is one reason that rules above all others when it comes to why investors should carry out due diligence on a startup before they invest.
What is it you ask?
Due diligence reduces the risk of losing your investment money.
By examining the company’s valuation, business strategy, financials, existing and future revenue streams, you are able to predict its scalability and ultimately, its chances of success.
Some investors will also want to know about the team leading the company and customer and supplier information.
If the business is involved in any litigation, this is something that needs to be disclosed.
However, due diligence can also be as simple as gut feel.
Do you like them?
Do you trust them?
Finally, and possibly most importantly, do you think they are capable of executing their business strategy?
All of these questions are crucial for a successful partnership with your founders.
It’s highly likely you’re going to spend a substantial amount of time with your investors.
They may be hands on, provide mentoring or even have a seat on your board.
It’s important that you get along professionally.
But your relationship and ultimately the business, will be most successful if you like them and what they stand for.
Do your values align?
Do you share a similar vision for your business?
Are you confident you’ll get the support you need to take your company to the next level?
If the answer to any of these questions is no, consider if they are the right fit before you sign on the dotted line.
Even before you get to the meeting stage, it’s worth investigating the companies they have invested in previously.
Do any overlap with what you’re trying to achieve?
Are you fundamentally opposed to what or who any of the businesses stand for?
Due diligence isn’t a dirty phrase.
It’s an essential part of doing business.
Most of all, it shows investors and ultimately your customers just how committed you are to achieving your goals.