Due Diligence Proses

Due Diligence Process
The due diligence in venture capital

In venture capital, the due diligence process is used by
investors to carefully evaluate the business and legal
aspects of a potential investment opportunity.
One should select the potential winners, identify the
key risks, and develop a risk mitigation plan with
company management as part of the potential venture
capital investment.
It involves three sequential stages: screening due
diligence, business due diligence and legal due
diligence.
The due diligence in venture capital
The venture capital (VC) industry uses due diligence to describe what the investor
does to evaluate a potential investment opportunity. By definition, investing in
early-stage companies is risky. The due diligence process should select the potential
winners, identify the key risks associated with the investment and develop a risk
mitigation plan with company management as part of a potential investment.
• Due diligence is a rigorous process that determines whether or not the venture
capital fund or other investor will invest in your company. The process involves
asking and answering a series of questions to evaluate the business and legal
aspects of the opportunity. Once the process is complete, the investor will use the
outcomes of the process to finalize the internal approval process and complete the
investment.
There are three stages of due diligence:

1) Screening due diligence
2) Business due diligence
3) Legal due diligence
Stage 1: Screening due diligence

Venture funds review and evaluate hundreds of business
opportunities over the life of the fund and use predetermined
criteria to identify which opportunities to focus on as possible
investments. This allows them to quickly flag the ones that fit and
indicate that they will spend more time and money evaluating.
Most opportunities do not make it through screening for two

reasons:
• The opportunity does not fit the fund’s mandate or criteria (e.g., the
business’ stage, geographic region, size of the deal, industry sector).
• Some funds will only review opportunities that have come via a
referral from a trusted source.
Stage 2: Business due diligence

Once the opportunity is determined to “fit” the
fund’s investment criteria, the deal is assigned to a
junior and senior member of the team who will
investigate further to determine the viability of the
deal.
Each firm may have a specific process, but it tends
to involve reviewing the management team,
market potential, the product or service (and the
need it meets) and the business model.
Stage 3: Legal due diligence

• Once the fund has reached the stage of moving toward a
favourable decision, their lawyer will complete a legal review.
• Make sure that your lawyer is prepared to answer their
questions. The advisors you choose can reflect favourably on
you, including your lawyers, so do your research to find the right
ones.
• Ask for references to determine which firms investors respect
and use themselves.
• If the VC is highly experienced in this area (or has in-house legal
counsel), they may take on part of the review to reduce the
overall deal expenses.
Tips for startups on due diligence
a)Prepare due diligence binders : Once you’ve decided

to raise money from outside investors, take the time to prepare due
diligence binders.
 Assign the coordination of binders to one person who will keep track of
information and update documents when appropriate.
 Having due diligence binders ready will demonstrate to the potential
investor that you are prepared. It will also speed up the review process.
 Using these business and legal checklists enables you to anticipate
most of the information requested.
 Respond quickly and professionally to any additional investor requests.
Remember that they are evaluating the content of your response as
well as how you respond to the various requests as part of the
assessment.
b) Consider due diligence your process too :

After an investment, you will experience both
good and bad times, and events might not unfold
as planned. Make sure that this investor can
become a long-term partner.
• Assign a point person for communications.
• Have one person coordinate the responses to the
VC. This ensures the consistency of your messaging
to the investor.
c) Answer your investor’s questions thoroughly : As
you answer an investor’s questions, circle back to make
sure that you’ve provided a complete response. Take
the opportunity to see if the investor is still warm to
the deal. It is better to find out early that they are not
likely to invest.
• Use feedback with other investors.
• Take the feedback you receive throughout the process to
course correct with other potential investors. It’s likely
that one group’s concerns may come up with other
investors.
d) Build trust with your investor : Getting

through the due diligence process is an important
step to successfully raising money but also a
critical part in the development of a relationship
with the investor. During this process, you’ll build
trust and establish the groundwork for an ongoing
partnership.
• A positive outcome of the business due diligence
process should lead to the issuance of a term sheet.
THANK YOU

Due Diligence Proses

Uploaded by

Copyright:

Available Formats

Due Diligence Proses

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Due Diligence Proses

Uploaded by

Copyright:

Available Formats

Due Diligence Process

The due diligence in venture capital

There are three stages of due diligence:

Stage 1: Screening due diligence

Most opportunities do not make it through screening for two

Stage 2: Business due diligence

Stage 3: Legal due diligence

a)Prepare due diligence binders : Once you’ve decided

b) Consider due diligence your process too :

d) Build trust with your investor : Getting

You might also like