Anyone who has seen Shark Tank or Dragon’s Den or any other program where millionaire investors put startups through their paces, is familiar with the concept of due diligence. The concept is that no rational person would ever invest money in an item or service that they don’t know about. The need for diligence when fundraising is essential.
Due diligence in fundraising is a method which involves gathering data and documents. It requires the founders to provide supporting documents to justify the claims made during the pitch, and also to demonstrate operational nitty gritty and reveal any potential risks to investment. Knowing what is required of you in terms information gathering will help accelerate your fundraising process and ensure that all the documents are readily available.
While the scope of due diligence in fundraising is fairly clear the specifics differ depending on a company’s stage of development and the size of the investment round. At the angel and seed stages, obligations on both sides of the table are relatively small but as a business gets closer to https://eurodataroom.com/how-can-an-online-data-room-benefit-your-business/ series A, due diligence becomes more rigorous.
A good idea is to develop a risk matrix and system to identify the types of people who require further research. For instance, nonprofits need to consider their policies on accepting gifts and develop a method of screening out donors with known criminal histories or known scandals. In addition, they can establish donor tracking systems that will automatically flag any media mentions of their biggest donors in case of newsworthy events.