Anyone who has watched Shark Tank or Dragon’s Den or any other show where millionaire investors test startups, is familiar with the idea of due diligence. The idea behind it is that no person in their right mind would ever put down money for a product or service about which they know nothing. It is vital to conduct fundraising with diligence. important.
Due diligence in fundraising is a process of document-gathering and data collection. It requires that the founders provide corroborative documents to back up claims made during the pitch, demonstrate operational nitty gritty and reveal any potential risks to investment. Knowing what is expected of you in terms information gathering will allow you to speed up the fundraising and ensure all documents are available.
While the scope of due diligence in fundraising is well-defined however the specifics of due diligence differ depending on a company’s stage of development and the size of the investment round. Due diligence obligations aren’t as strict at the stage of seed and angel however, they become more stringent as the company moves toward series A.
An ideal practice is to develop a risk matrix and system that can identify the kinds of prospects who require further investigation. Non-profits, for instance should look over their policies on gift acceptance to determine how they identify donors with criminal records or are involved in scandals. They can also set up donor tracking software that monitors any media mentions of their biggest donors, in the event of notable incidents.