Congratulations you are a founder and investors expressed interest in your round! Now what? How do they verify everything you “claimed” was true in your deck? DUE DILIGENCE! If you are one of the 40+ athletes/entertainers we have been doing this service for free the last 8 years you know how serious and expensive this is to us.
For founders here is what you can expect:
1. COMMERCIAL DILIGENCE: looking to verify the purpose and actual use-case of the product of service. Also looking to confirm size, competition, and growth. Lots of time spent on exit channels and strategic partners.
2. TECHNICAL DILIGENCE: VC’s often bring in a technical partner or advisor to validate your code, IP, software, licenses, hardware etc. Diligence the scalability. How quickly can someone replicate and how defensible it is. Heavy attention paid to the quality of the development and evaluation of the technical roadmap.
3. FINANCIAL DILIGENCE: my favorite part. Looking through your books, financial planning/projections, cash reserves and burn and doing scenario analysis. Also looking to underwrite certain returns per the VC’s mandate here. (Can I make 5x in 5-7 years etc). Pro forma income statement MoM very important here. But the financial model is desirable.
4. LEGAL DILIGENCE: typically costs us 5-10k if we are just reviewing but 10-20k if we are leading. Digging into the shareholder agreement, contracts, past legal reports, customer, employee and supplier contracts. Negotiating terms to protect investors.
My advice is set up a data room on box.com or Dropbox and has folders for each category and all docs to support your claims. Have your advisors/lawyers help. Typically takes 2-3 weeks to finish this process. Deals get canceled or terms change if you don’t do this well!
Happy hunting! 💰✊🏾👨🏾💻 #kemetinstitute