How to get prepared for a start-up due — diligence: an ultimate guide for start-up founders with investors’ opinion.
Fundraising is a pain for every start-up founder. Understanding the due-diligence process and preparing for it in advance will significantly help founders in their fundraising journey and decrease the time to money for their start-up!
Now let’s understand the basics of due — diligence
Basically due — diligence is divided into two categories i.e., Business due — diligence and Start-up due — diligence. Here we will discuss start-up due — diligence in detail.
So, business due — diligence is commonly associated with business audits. In practice, it’s an examination of a company from every angle at the end of the financial year, before an important contract is signed or prior to attracting investors’ capital, M&A event, etc.
When it comes to start-ups' due diligence, especially for an early stage, the process looks quite different. It is still an analysis of the company, still a kind of audit. But it is no use examining financial reports — in most cases, they do not yet exist. The main question of the classic due — diligence is “Is everything in this business legal and clear?”; in its turn, the main important question of the start-up due — diligence is “Will it potentially works and generate growth revenue?”
The start-up due — diligence is a kind of form that must be filled. The questions in the form are generally divided into common 4 parts: Team due diligence, Market due diligence, Product due diligence, financial due diligence. The due — diligence of some start-ups could contain specific questions that differ and are very dependent on the start-up’s stage, sector, business model, and other aspects.
Start-up Due-Diligence Questions
· How many team members are working in your start-up?
· Does every team member have defined roles and responsibilities?
· Is there a person in a team that has the final say like, CEO or representative director?
· Are members of the team experienced?
· What is the average experience of the team members? Do they have relevant experience?
· How much your team members are committed to your start-up idea?
· Do core team members know about potential competitors, target market, and potential customers?
· Have management team members chosen an emerging market to enter?
· What’s chosen market size?
· Is it easy to enter the market (in terms of government regulations)?
· Are there any subsidies from the government for start-ups in your core industry?
· Are there any competitors in the market? If there are — are they strong? How long have they been operating in the market?
· Where is the chosen market (what region)? Is this region developed or developing?
· Is it expensive to get a new customer in the growing market?
· How much will it approximately cost? What’s the churn rate?
· What is your expected profit turnaround in your market?
· Is there a product prototype (proof of concept, proof of work, MVP, etc.)?
· Is a product tried and tested? and is there any feedback from prospective consumers?
· Is a product patented? Will there be any problems with IP protection in a chosen market or any?
· Is a product unique? If it is not — why is it better than competitors’ products?
· Are there development prospects of a product?
· Is the product scalable?
· Is there any financial plan? And who has developed the plan?
· Do you have a CFO to manage your finances? If yes, then what is the experiences and qualifications of your CFO?
· According to the financial plan, when will expense pay off — in the short-/medium-/long- term?
· Do your team members have anything to invest in your start-up?
· Have any of your team members ever succeeded in start-up investment attraction?
It must be noted one more time, that due diligence of operating businesses and due diligence of start-ups differ a lot!
Due diligence for different purposes has different structures as well as due diligence for operating start-up and the one for start-up at MVP or early stage. The standard execution can be divided into such areas as e.g., financial audit, product audit, management audit. It’s always quite a time-consuming process which commonly includes analysis of all operations of the company and can last for months. The founders and executive team members must be well prepared and consider dedicating enough time and resources for the due-diligence process. Good Luck!