A proper understanding of due diligence and what investors are looking for when it comes to your startup is essential for any founder.

Due diligence refers to the audit an investor will carry out when investigating your startup for potential funding.

But knowing how to prepare your due diligence so that it can be adequately analysed by an investor can be confusing.

What exactly does the investor want to know? How should the information be communicated?

Below we will discuss what investors look for when it comes to a startup’s due diligence process.

1. Governance, structure and corporate records

Investors pay close attention to a company's governance structure, which includes the board of directors (if applicable to your organisation) and its decision-making processes.

They want to ensure that the company has a strong and independent board that can provide effective oversight and strategic guidance to the management team.

Investors look for diversity in the board of directors, including gender, ethnicity, and industry expertise. They also want to see that the board is not dominated by insiders, who may have a conflict of interest.

Investors also need to make sure your startup holds all the appropriate company records and agreements.

This includes documentation such as current and historicalASIC company extract for top company and operational subsidiaries, company constitution, shareholder agreements, and ESIC eligibility statement (if applicable to your organisation).

It’s also a good idea to include references for your management team, so that the potential investor can investigate their credibility.

2. Legal requirements

Investors want to ensure that your startup is compliant with all relevant laws and regulations.

They want to see that the company has all the necessary licenses and permits to operate, and that it is not involved in any litigation or regulatory proceedings that could impact its future viability.

Investors also look for evidence of strong intellectual property protection, such as patents, trademarks and copyrights, which can protect the company's innovations and competitive advantages.

Also, if any intellectual property was created prior to the formation of the company, it’s essential to assign that IP to the company via an IP assignment. Investors will want to see proof of this.

3. Staffing Requirements

Investors pay close attention to a startup's staffing requirements, including the quality of the management team, employees and the hiring process.

They want to see that the management team has a track record of success and that they have the necessary skills and expertise to lead the company.

Investors also look for evidence of a strong corporate culture and a commitment to diversity and inclusion.

Including the company’s organisational chart is a good idea, as well as all employee contracts and IP assignments.

This enables the potential investor to get a clear picture of how your startup functions day-to-day, and will help the investor to check for flaws or opportunities in its human resource structure.

4. Financials

Investors also want to see that the startup has a sound financial plan and a clear path to profitability.

They want to see evidence of revenue growth, strong margins and a clear understanding of the company's key financial metrics.

Investors also look for evidence of strong cash management practices, including cash flow forecasting, working capital management and contingency planning.

They want to see that the company has a clear understanding of its funding requirements and a well-defined plan for raising further capital if needed.

It’s essential to include documentation in your due diligence process, such as a current profit and loss statement, current balance sheet and five-year cashflow forecast.

5. Sales and Marketing

When looking into your startup, potential investors want to see evidence of a strong sales and marketing strategy that will drive customer/client acquisition and revenue growth.  

They want to see that the startup has a clear understanding of its target market, including customer needs and preferences, and that it has a well-defined value proposition that differentiates it from competitors.

If your business is already established, investors will also look for evidence of effective marketing campaigns and a strong digital presence, including social media, email marketing, and website performance.

All of the above should be clearly laid out in your company’s marketing plan, which should also include the necessary market research into your target market and market validation that your product/service is in demand.

It’s also important to include your current sales pipeline, and any sales contracts and agreements that are already in place.

6. Technology

Startups also need to clearly explain the technology behind their product or service to an investor, so that the investor can assess the feasibility of the business.  

Striking the balance between providing too much technical detail and oversimplifying the product or service is key.

Founders should aim to explain the technology in a clear and concise way, without overwhelming the investor with unnecessary jargon or complexity.

It's also important to highlight any unique features or advantages that the technology has over existing solutions in the market.

Investors want to see evidence of a strong technology platform that can support the startup's growth and expansion plans.

Additionally, startups should be transparent about any potential risks or limitations associated with the technology, as this shows a level of maturity and professionalism that can instil confidence in the investor.

They want to see that the company has a clear understanding of its technology requirements and a plan for investing in and upgrading its technology platform as needed.

Founders should include documentation in their due diligence such as technology overview, design documents, development pipeline and status, and developer contracts (if outsourced).

Conclusion

In summary, investors look for a range of factors when it comes to a startup’s due diligence.

By carefully assessing these factors, investors can make informed decisions about whether to invest in a startup and how to structure the investment to maximise its potential for success.

Ultimately, the goal of due diligence is to ensure that the investor's capital is deployed in a way that generates maximum returns while minimising risk.