03/08/2021
Understanding what to expect in the due-diligence process when raising capital will allow you to save a substantial amount of time, energy and money.
Private investors and family offices are bombarded with incoming deal flow, fund manager pitches, direct deals, etc. Well-known angel investors, single family offices, staff must coordinate and prioritize relationships amid a constant flow of in-person meetings, a bloated email inbox, and a seemingly endless barrage of phone calls. In order to manage the chaos, they develop and implement processes to quickly evaluate opportunities, deflect those deemed to be wastes of time, and have junior analysts screen the promising deals.
For an investor to conduct in-depth due diligence means they are following a due diligence process aimed at ensuring that any fund manager or investment opportunity selected or investment made fits within the investors mandate and meets the family offices and Chief Investment Officers criteria. This is critical to avoid frauds, underperforming fund managers, and wild goose chases spent running after poorly structured investment banking deals.
Are you prepared for all the due-diligence an investor will conduct on your deal?
One ultra-wealthy investor I interviewed for my book said the following, “We only work with people whom we get to know over a reasonable period of time and have a deep understanding of what they are offering. We start with a review of the resume to determine if the individual actually has the required skills and experience. The in-person meeting fills in the material not captured on the resume. Discussion with past and existing investors is mandatory. Everything has a beginning, middle, and end. If the beginning, middle, and end are not clearly set in the investment proposal, we move on. It is not our responsibility to educate investment promoters to the basics; a clearly defined exit is a basic requirement of any investment proposal."
“The investment fact pattern determines how we move forward with those whom we invest alongside; each opportunity is slightly different. Setting expectations early in the process saves both sides significant time. Walking through the details of the transaction sometimes uncovers ‘blind spots’ that need to be addressed. A thorough due diligence checklist that is applied to the revenue stream and expenditure flow is a solid starting point. Experience and professional judgment are the ‘glue’ that hold the due diligence process together, and ‘hopefully’ minimize the risk of nefarious activity arising."
Here are some additional quick tips and points of awareness that could better prepare you for due-diligence:
1. Know which due diligence questions will be asked
2. Create a master due diligence questionnaire
3. Social Media Due Diligence
4. Background checks and private investigator usage
5. Improving your data room construction and architecture
6. Understand third party due diligence report strategies
7. Use of Video/Webinars & Audio in due diligence processes
8. Have an FAQ one-pager separate from your offerings one-pager/executive summary
There are many ways to be prepared and cover any potential due-diligence blind spot, but anyone serious about raising capital should do everything in their power to cover all sides of the process and effectively as possible to avoid loss of time, energy and valuable resources.
We hope you have a great start to your week and thank you for reading,