Due Diligence Checklist for Your First Round of Funding

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So you’ve built the foundation and framework of your startup. You’ve hired a talented and energetic team. You have real customers, real sales, and a repeatable, profitable system in place. You may even have bites from venture capitalists for your first round of funding. In short, you’ve reached a point where long-term profits are well within sight. Now, you just need some outside help to get there.

Before you sit back and pop open that bottle of champagne, however, it’s important to do some homework—as in, you need to make sure all your ducks are in a row before the investor jumps into the due diligence process. 

What’s Due Diligence? 

Due diligence is when potential investors take a deep dive into your company to confirm it’s a safe investment, that what they’re investing in has real and long-term potential—and if there are any risks or red flags that could hurt their investment. 

Here’s another truth about the due diligence process: it can be challenging and unnerving for even the most seasoned entrepreneurs. Fortunately, there’s a lot of prep work you can do up front to discover and mitigate any problems that might disrupt the process. 

Top Checklist Items to Prepare for the Due Diligence Process

Here’s what to prepare right now to wow investors and get the funding your company deserves.

1. Your Finances

What investors will look for: 

This is where you can expect the most questions and the most amount of homework. During this part of the process, an investor will examine, question, and sometimes scrutinize the numbers on your income statements. They’ll also want proof that your past financial performance is accurate and that you’re following sound taxation practices. They’re interested in the future, too. The venture capital group will examine your current business plan and your forecasts for the next few years to determine if the company is a solid investment.

How to prepare: 

Make sure you pull your most recent financial statements, your business plan and financial projections, and proof of tax compliance. Keep in mind that messy bookkeeping makes such documents subject to flaws and could jeopardize your chance of an investment. Because this section is usually so detailed and requires 100% accuracy, it’s a good idea to tap a financial expert or invest in an intuitive online financial software to make sure you don’t miss a beat. 

Your financial documents tell your investors a story—how you manage money, how you plan to grow your business, etc. Working with an expert to get your books in order (before investors start looking) will help you understand the story they are currently telling. 

2. Your Team

What investors will look for:

You spent a lot of time looking for and investing in the best talent for your startup—after all, they’re the people you rely on to grow your business. That’s why a lot of investors want to know the value of your team and if you’ve brought on the right experts to get the job done. Investors also want to ensure they’re putting their money toward a team they can trust. 

How to prepare:

Your key employees and senior leadership may be asked to provide background checks and professional references. An investor may also ask former employees and current colleagues about your company’s leadership. To make this process as stress-free as possible, consider providing an organizational chart, proof of your team’s relevant background, and a copy of your employee handbook. 

3. Your Legal Stuff

What investors will look for:

This one is simple. Investors want to know what existing or potential legal issues, if any, might make their investment a risky one. 

How to prepare:

Lack of proper documentation might get some entrepreneurs in trouble. Fortunately, they’re all things you should already have readily available. Be prepared to present any and all contractual arrangements relating to leases, loans, terms of service agreements, insurance policies, trademarks, intellectual property, or patents. 

4. Your Customers

What investors will look for:

Companies that foster and maintain strong relationships with their customers understand the secret to long-term success. That’s why investors want to know about a company’s customer base, like the length of the relationship or sales totals per customer. 

How to prepare:

An investor might want to look at a list of your company’s best customers, including sales contributions and length of the customer relationship. They might also ask about customers who broke off relationships and why it may have ended. 

Are You Ready to Tackle the Due Diligence Process Head-On? 

While one venture capital group’s due diligence checklist might differ from another’s, having your company’s paperwork and documentation buttoned up can ensure a successful and headache-free process.

Fortunately, smart finance software puts all the information you need right at your fingertips, so you can stop digging through paperwork in your desk drawer. ScaleFactor’s Business Insights, Cash Vision, and Tax Compliance tools are just a few features to help you pass the due diligence checklist with flying colors. Request a demo with ScaleFactor today to learn how its software can help you keep track of the stuff that matters—without all the hassle.

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