Getting Due Diligence Ready

We’re getting into that time of the year where VCs stereotypically head for their yachts. From where I stand, there’s still a ton of deal activity, but late July and definitely August are still not great times to begin new funding discussions. So, now’s the perfect time to get your ship in order so you can start fundraising hard come Labour Day.

I’ve said this before, and I’ll say it again: the decision to give an entrepreneur cold hard cash is all about trust. I trust you to take my $1 and make it $5 or $10. One important datapoint in forming my trust thesis as an investor is how organized you and your company are. No matter what your company size, your key documents should be organized and readily available. And you should know what’s in them.

So, if you have not done so already, I recommend picking up a Neat scanner and getting yourself due diligence ready.

Getting Due Diligence Ready

There are two types of due diligence: business and legal.

Investors will perform business diligence before they issue a term sheet. This can take many forms but usually involves lots of reference calls to industry experts, founder references, etc. It also often involves digging deep into your grasp of the opportunity and the depth of your thinking around it.

Once investors pull the trigger and make you an offer (which you agree to) then the lawyers kick in. They will deliver a nice thick list of document requests. The faster you deliver them what they need, the faster the deal closes (and the lower the legal costs).

Business Diligence

To get business diligence ready, make sure you have the following before approaching potential investors:

– Standard investor documents: Investor presentation, Executive Summary, financial forecast or pro formas.

– Deep dive documents: Product roadmap, team bios, summary of customer development/ validation work done.

– Padding the file documents: market size calculation, competitive analysis.

Legal Diligence

In this link you will find a list from a leading US venture law firm. It covers a wide range of matters all of which you will need to have organized and ready. The most important ones by far:

Intellectual property and IP assignment: make sure every current and former employee and subcontractor / consultant has signed a document assigning all IP rights to the company. The last thing you want is to become a wild success and then have someone who used to work with your company claim they own part of the technology.

Open source exposure: Everything is built on top of open source technologies today. It is important to keep an ongoing list of open source software used and what license you are using. As investors, we want to avoid GPL exposure forcing us to contribute source code back in a way that compromises the IP value of the company.

Liabilities: This is particularly important for me as a seed investor. Founders can be very creative in bootstrapping their way to a first financing. I want to make sure I have a very clear picture of who is owed what so I know how much cash will actually be available to grow the business.

So use this downtime to get yourself ready and start fundraising hard come September. Times are good now (too good?) so if you’re thinking about fundraising soon, get due dil ready and get funded faster!

  • Seems the document listed is like extremely difficult to purchase from Canada using docstoc. I've had to call their support line and even they can't figure it out. Are there any other locations where I would be able to find a version of the document.

    • Which document? The ones I posted are a free download

  • dwebbconnect

    Great information. Along the same path, partners may want to find ways to improve infrastructure to increase returns before selling. An event on 8-2-12 is going to include doing IT due diligence.

  • Good Summary Mark, another thing we've found to be very helpful is to use a virtual data room for due diligence documents to help speed up the process. Users – potential investors – can be given secure logins to access specific files, all in a controlled environment. ShareVault ( offers a great solution.

    • Yes. Virtual data rooms are great. Especially in competitive scenarios since you know who is actually accessing your data

  • Resourceful post as usual, Mark. Maybe in another post or even here, can you talk about creating demand for the deal among VCs? We all know it's easier to close a round if there's demand for it but it requires balancing credibility and gamesmanship. Maybe examples of an entrepreneur who's really good at this and how they do it could be a good start. Thanks in advance.

    • That's a great topic Paul. Will tackle that one soon

  • Ian

    Great post Mark.

    Interested in your thoughts on at what point a start-up should start the search for funding. Should you start pitching when all you have is a napkin drawing or wait until you have established a decent level of traction with revenue and need money to grow or some where in between.

    • Good question. In my World at least (web and mobile software) its more or less free to build these days. So if you come in with just an idea you're competing for $ with people who have at least prototypes and often fully released products. The further you can get before looking for $ the better

      • Shawn Carver

        Great post, Mark. Thorough and accessible overview on a topic that many first time founders find a bit mystifying. I understand and agree with your comment that the further along you are the better when it comes to fundraising. However, with that being said, do you see any value in (or issues with) an early stage startup team asking prospective investors if they would be amenable to receiving brief updates on progress every month or so, in order to build relationships for when the company is in a position to actually raise a round?

        • Relationship building is totally separate from diligence – and yes, its never too early to start building a relationship. The more interactions between investors and a company the more chances to build trust and rapport. Makes it much easier to move in to formal fundraising discussions

        • Ian

          This is a challenging conundrum … agree that building relationships is different than seeking funding but, it can also be distracting. Relationship building can also be time consuming … the key early on seems to be focus but "on what" and "when" to shift gears from business building to fund raising. Start-ups have a finite supply of time.

          Have heard many times that the best time to seek funding is when you need money to grow.

        • That's like saying I'll postpone dating till I need to get married. Seriously! This is a multi year relationship. Both sides should want and need lots of touch points.

        • Ian

          Dating under age is illegal in some provinces. 🙂

  • Great roundup Mark. The list required is likely underappreciated by most raising money for the first time.

    • Thanks Thomas. For sure. And the last thing you want is having your super expensive lawyer do this for you. Great way to blow a stack of cash