A startupper knows that the path from pitch to investment is not a quick one. And one of the mandatory steps in this process is due diligence. In this article, we are going to discuss the basic components of the startup evaluation procedure.
Due diligence: which points are important for investors in startup pitch decks?
Entrepreneurs who were able to hook the investor with their pitch and arouse their active interest in their idea are wary of the “due diligence” stage. The purpose of due diligence is to reduce or completely avoid the risks associated with investing, including the risk of acquiring a quota in a business at an inflated price, losing investments, defaulting on obligations assumed by the team, withholding important data, etc.
For financial investors, start-ups offer correspondingly large return opportunities with an investment. However, the process for start-up investments differs from other M&A processes in terms of preparation and implementation. The specific challenges must be addressed to overcome them and ensure participation is successful.
Due diligence for start-ups needs to focus on the following reasons:
- Dynamic growth: Since start-ups mainly focus on rapid growth or rapid market entry or research progress, problems that arise are dealt with rather pragmatically. This can result in significant risks that are not visible at first glance.
- Focusing on one technology: The business model is usually based on one technology as the only mainstay, which is of course inherent in the life phase. If the legal issues, such as ownership of the patent or the right of use, are not sufficiently clarified, major hurdles can arise for the continued existence of the start-up. Furthermore, legal requirements that may be of essential importance for the success of the business model must be observed. Examples include data protection or public law approvals.
- Guarantees in sales contracts: Similar to M&A transactions, founders also give guarantees, which, however, can be serviced in the rarest of cases should they occur.
Virtual data room – an important element of due diligence checklist
As a result of the due diligence procedure, the client will receive an opinion on each direction, a description of the current market situation, and recommendations. As a rule, experts explain the conclusions of the study, provide the customer with detailed comments on points of interest. Here is the minimum checklist of the components that the conclusion should contain:
- brief analytical conclusions,
- the position of the company in the market,
- organizational structure and employees,
- accounting principles,
- IT resources, process automation,
- results of commercial activity,
- net assets,
- the flow of funds,
- the tax situation
- financial forecast.
An important element of this checklist is organizing a virtual data room. To prepare for the due diligence, data rooms provide the startups with a folder structure in which the respective documents should be stored. Data room ensures a secure digital platform for storing confidential documents during business transactions.
The implementation of the program allows you to optimize and automate the processes associated with digitized documents. Enterprise automation provides full control of the movement of internal and external documents and their routing.
The use of the data room document exchange allows you to combine all corporate information and create a digital environment for office work and convenient work with files. Today, the use of data room is vital for the operation of any enterprise, regardless of its organizational structure of management, scale, or turnover.The solution opens up new opportunities for working with statistics and analytics. All business processes become transparent, which allows you to eliminate weaknesses in the business, reduce production and operating costs, and control the operation of the enterprise through online monitoring.