Due Diligence Preparation
Due diligence takes 2-4 months typically. Missing documents delay or kill deals. Having materials ready improves credibility and speeds process. Start preparation 2-3 months before approaching investors. Professional preparation prevents issues and improves deal terms.
Documents Investors Request
Financial statements (3-5 years)
P&L, balance sheet, cash flow
Tax returns (3-5 years)
Bank statements (12-24 months)
Financial projections (3-5 years)
Incorporation documents
Articles, bylaws, operating agreements
Cap table
Current ownership structure
Contracts
Customer, vendor, employment, leases
IP filings
Patents, trademarks, copyrights
Financial Statement Requirements
Accuracy critical: Investors spot inconsistencies. Errors signal poor management or dishonesty. Both kill deals. Financial statements must be: accurate, consistent, and complete. Professional accounting helps ensure accuracy. Missing or inaccurate financials = deal killer.
Audit requirements: Required for larger deals ($10M+ typically). PE typically requires audited statements. Seed rounds may accept reviewed statements. Early-stage may accept compiled statements. Audit requirements vary by investor type and deal size. Research requirements before fundraising.
Financial projections: Realistic assumptions based on historical performance and market research. Show best/base/worst cases. Unrealistic projections = credibility loss. Investors evaluate projection realism. Conservative projections outperform optimistic ones. Include: revenue projections, cost structure, cash flow, and key metrics.
Historical financials: 3-5 years required for most investors. Show trends: revenue growth, profitability, cash flow, and key metrics. Missing historical financials delay process. Investors evaluate financial trends. Declining trends reduce interest. Growing trends improve interest.
Tax returns: 3-5 years required. Tax returns verify financial statements. Inconsistencies between tax returns and financial statements create problems. Ensure consistency. Professional accounting helps ensure consistency.
What varies: Financial requirements differ by investor type, deal size, and business stage. VCs may accept less financial history than PE. Research requirements relevant to your investor type.
Legal Structure and Entity Considerations
Entity type matters: C-corps work for VCs (preferred structure). LLCs for real estate (pass-through taxation). S-corps limit investor types (no institutional investors). Wrong structure = restructuring cost ($5K-$25K typically). Research investor structure preferences before fundraising.
Cap table requirements: Clean, accurate ownership structure. Complex cap tables slow deals. Include: founders, employees (options), investors, advisors, and option pools. Option pools expected (15-20% typical). Missing option pools raise questions. Keep cap table updated. Inaccurate cap tables create problems.
Contract review: Customer contracts, vendor agreements, employment contracts, and leases reviewed during due diligence. Material contracts affect deal terms. Unfavorable contracts create problems. Review contracts before fundraising. Address unfavorable terms proactively.
IP protection: Patents, trademarks, copyrights, and trade secrets. IP protection affects business value. Missing IP protection reduces value. Strong IP protection improves value. Review IP status before fundraising. Address IP gaps proactively.
Compliance status: Regulatory compliance, licenses, permits, and certifications. Missing compliance creates problems. Investors evaluate compliance status. Address compliance issues before fundraising. Missing compliance delays or kills deals.
What varies: Legal requirements differ by investor type, deal size, and industry. VCs require different structures than real estate investors. Research requirements relevant to your investor type and industry.
What Delays or Kills Deals
Missing documents: Incomplete data room = delays. Prolonged delays kill momentum. Investors lose interest. Missing documents signal: poor preparation, disorganization, or hidden problems. Have all documents ready before due diligence starts. Professional preparation prevents delays.
Financial discrepancies: Numbers that don't match signal problems. Inconsistencies between: financial statements, tax returns, and projections create problems. Investors evaluate financial accuracy. Errors signal poor management or dishonesty. Both kill deals. Clean up financials before due diligence.
Legal issues: Pending lawsuits, compliance problems, IP disputes, or regulatory issues. Legal issues create risk. Investors evaluate legal risk. Address legal issues before fundraising. Missing legal issues delays or kills deals. Legal counsel helps identify and address issues.
Surprises: Information not disclosed upfront. Investors hate surprises. Disclose issues early. Surprises damage trust. Trust is essential for deals. Disclose all material information upfront. Hidden issues create problems.
Poor financial performance: Declining revenue, negative cash flow, or unprofitable without clear path. Poor performance reduces investor interest. Investors evaluate financial health. Address performance issues before fundraising. Show improvement trajectory.
What varies: Deal killers differ by investor type and deal size. VCs may accept different issues than PE. Research investor-specific concerns before fundraising.
Efficient Due Diligence Preparation
Start early: Begin 2-3 months before investor outreach. Missing documents take time to gather. Some documents require: third-party preparation, legal review, or external verification. Early preparation prevents delays. Rushing preparation creates problems.
Virtual data room: Organized virtual data room (Dropbox, Google Drive, or specialized platforms). Folder structure by category: financials, legal, business, operations. Version control essential. Professional data rooms improve credibility. Disorganized data rooms signal problems.
Professional help: Accountants prepare financials. Attorneys review legal documents. Investment required but prevents issues. Professional preparation improves credibility and prevents problems. Don't skip professional help to save costs.
Document checklist: Create checklist of required documents. Track completion status. Missing documents delay process. Checklists ensure completeness. Update checklist as requirements become clear.
Regular updates: Update documents as business changes. Outdated documents create problems. Keep data room current. Regular updates prevent last-minute scrambling.
What varies: Preparation requirements differ by investor type, deal size, and industry. PE requires more extensive preparation than angels. Research requirements relevant to your investor type.
When to Involve Professionals
Legal counsel: Essential for any material fundraise. Deal structuring, compliance, contract review, and negotiation. Legal counsel helps: structure deals properly, ensure compliance, and protect interests. Don't skip legal counsel. Improper structures create liability.
Accounting professionals: Financial statement preparation, audits, and financial analysis. Larger deals need audited statements. Professional accounting ensures accuracy. Inaccurate financials kill deals. Professional accounting prevents problems.
Investment banking: Larger deals ($10M+). Deal structuring, investor introductions, negotiation support, and due diligence coordination. Investment banks provide: expertise, relationships, and process management. Banks charge fees (1-3% typically) but improve access and terms.
Valuation experts: For complex valuations or disputes. Valuation experts provide: independent valuations, fairness opinions, and valuation support. Useful for: complex structures, disputes, or regulatory requirements. Evaluate need based on deal complexity.
Due diligence advisors: For complex businesses or industries. Due diligence advisors provide: industry expertise, process management, and risk assessment. Useful for: complex businesses, regulated industries, or first-time fundraisers. Evaluate need based on complexity.
What varies: Professional needs differ by deal size, complexity, and investor type. Larger deals require more professionals. Complex businesses require more expertise. Research professional needs relevant to your deal.
Due Diligence Process and Timeline
Investors request initial document set (financials, legal, business).
Investors request additional documents based on initial review.
Investors meet with management team.
Investors call customers, vendors, and references.
Some deals take longer (4-6 months) if complex or if issues arise.
Common Due Diligence Mistakes
Incomplete data room: Missing documents delay process. Prolonged delays kill momentum. Have all documents ready before due diligence starts. Professional preparation prevents delays.
Financial inaccuracies: Errors signal poor management or dishonesty. Both kill deals. Professional accounting ensures accuracy. Review financials before due diligence.
Slow responses: Delayed responses delay process. Investors lose interest. Respond quickly (within 24-48 hours). Quick responses maintain momentum.
Hidden issues: Not disclosing material information upfront. Investors hate surprises. Disclose issues early. Surprises damage trust. Trust is essential for deals.
Skipping professional help: Trying to handle due diligence without professionals. Professional help prevents problems. Don't skip professionals to save costs. Problems cost more than prevention.