Due dilligence is one of the most important steps towards raising funds for any Company. It is found that most of the start-ups fail at this stage as they are unaware of the dos and don'ts of this Process. In a nutshell Due diligence is the process of ascertaining that the facts and figures stated by the entrepreneurs in their dialogues with the investors are in fact true.
Until this step, the conversations between the founders and the potential investors is mostly off-site. All the presentations, demos and models pertaining to the business, are solely under the founders’ control and staged in-house. All the proceedings until now are limited to a small group.
Business due diligence requires the investor (or a professional third party engaged by the investor) to actually step into your operations and validate everything that you have claimed, evaluate all types of risks, liabilities and vulnerabilities, and then determine whether your start-up is fit enough to be invested in. This process can at times take a ball-bursting approach since all your operations, financials, models, etc will be exposed and any loopholes or unforeseen problems will be highlighted, to which the only party answerable is you!
There are 3 Major angles in which an investor would ascertain if there are any unaccounted risks involved in investing in the company
Legal Due Diligence
This process is done to ascertain that the company has complied with all rules and regulations applicable to it and to ascertain if there are any hidden liabilities which might surface in the future. Legal due diligence is carried out not only of the company but also of the promoters.
Technical due diligence
This process is done to ensure that the Business model stated in the Projections and Pitch Deck is in fact viable and the milestones mentioned are in fact achievable. This is typically done by professionals who are industry experts and thus can provide critical industry insight.
Financial due diligence
This is done to ascertain if the financial results stated in the projects are in fact achievable. In detail discussions are done to ascertain if the value of the company as stated by the promoters is in fact justifiable.