Venture capital firms that invest in a company must undergo an exhaustive screening process. They’ll examine your business plan, financial forecasts, and other information.
It’s essential to be organized and proactive during this process. Venture capitalists receive hundreds of requests for funding each month, so companies that appear disorganized often go unnoticed.
The VC due diligence process overview
Due diligence in venture capital is the process by which an investor determines whether a business and its management are a good investment. The following is a quick overview of what happens during the VC due diligence process:
- Initial screening: A quick look at the pitch deck or executive summaries of companies is the first step to see if they match the investment criteria set by the investor.
- Evaluation of the management team: The investor will then evaluate the team’s experience, vision, and skills to ensure that the business plan is successfully executed.
- Market analysis: An investor will assess the size of the industry, the competition, and the position of the company in the market.
- Investors evaluate the product or service of a company to see if it is unique, innovative and offers a competitive edge.
- Investors review the financial statements of a company to determine its financial health and assess revenue growth potential. Profit margins are also assessed.
- Investors perform legal due diligence by reviewing the company’s documents such as contracts, intellectual property filings and patents to make sure there aren’t any legal disputes.
- Background checks and references: The investor interviews key customers, suppliers and industry experts and conducts background checks to gain more insight into the company and its management team.
- Final decision: The investor will make a decision based on the information collected during due diligence. If so, they decide how much money to invest.
The VC due-diligence process can last several weeks or even months depending on how complex the company is and how much due diligence is required. Due diligence is essential to reduce investment risk and maximize returns.
Venture Capital Due Diligence Questionnaires
Due diligence questions are a key tool for investors to make informed decisions about investing in startups and early-stage companies. Here are some of the key questions and areas that you can include in your due diligence questionnaire.
1. Information about the company
- Name, place, and date of incorporation
- Number of registration and registered office
- Certificate of incorporation
- Certificate of name change or articles of Association, if applicable
- Copy of the resolutions adopted by shareholders
- The list of members, the minutes of meetings, and the bylaws.
- Copy of all agreements that require consent from third parties for any transaction
- Has the company ever repurchased or redeemed its shares? If so, provide details.
- Contact details and a list of all those who have representation rights.
- Existe-t-il any agreements in place relating to the voting, disposal or acquisition of shares or securities by the company?
- Include all information regarding the authorized and issued capital. Include the number of classes and shares as well as whether they are being paid in whole or in part.
- Are there any intra-group transactions that were not transactions between parties at arm’s distance? If so, provide details.
- Has the capital of the company changed since the incorporation date? If so, provide details.
- Please provide copies of all documents listed below: Options, warrants and Securities.
- Do any debts or charges affect the assets of the company? If so, provide details.
- A business plan is a summary of the overall business strategy.
2. Details of company activity
- List the main activities of your company
- Do you have any other activities in your company? If so, provide details.
- What countries is the company active in?
- What activities are carried out outside of the country where you were incorporated?
- List all companies, partnerships, and associations in which the company has shares. Please also provide copies of any documents and details about capital.
- List any memberships in trade associations that the company holds.
3. Contracts and commitments
- All sales contracts for products or services that will take longer than six months to be delivered.
- Please find copies of the following agreements.
- Credit agreements that the company may have with customers
- Contracts that can’t be canceled without 30 days’ notice
- Contracts requiring third-party verification to be executed.
- Licenses and distribution agreements
- Copy the following arrangements
- When terminated, certain arrangements can lead to a change in control of the company
- Termination of certain arrangements can have a major financial impact on the company
- Copies of contracts of a material nature that are being negotiated at the moment
- Exist contracts, whether written or unwritten that may restrict the activities of your company? If so, provide details.
- Copy of the standard contract or conditions of the company.
- List of customers who accounted for over 5% of total revenues in the previous year. Include copies of contracts
- List of all suppliers who supplied more than 5% or the goods of the company in the previous year. Included are copies of the contracts.
- List of contracts with suppliers or customers that will expire in the next 12 months
- Copy of all material contracts that are not listed above
4. Business Model and Market
- What is the company’s business model?
- What is the market size, growth rate, and trends?
- Who are the main competitors, and how does the company differentiate itself?
- What is the company’s go-to-market strategy?
- What are the key risks to the business, and how does the company plan to mitigate them?
5. Management Team
- Who are the key members of the management team?
- What is their background and experience?
- What is their track record of success?
- What are their roles and responsibilities within the company?
- Are there any conflicts of interest or potential issues with the management team?
The term management team due diligence is used to describe the process of evaluating and assessing the members of a company’s leadership team. This is an important part of due diligence when evaluating an investment or an acquisition.During due diligence on management teams, the capabilities, experience and track record of the team are evaluated to determine if they are suitable for the organization’s goals. Here are a few key areas that management team due diligence typically covers:
Background and Experience
Review the professional experience and background of each member of the key management team. Examine their education, previous positions, expertise in the industry, and any notable milestones or achievements.
Assess each team member’s specific expertise and skills, paying particular attention to areas that are relevant to your organization’s business model, industry, and strategy. Assess their leadership and execution skills to ensure the company achieves its goals.
Leadership and Management Styles
Analyze each team member’s leadership and management styles. Take into account their ability to motivate and inspire employees, create a positive workplace culture, and resolve conflicts and challenges.
Check the performance of the team and their past. You should look for the ability of previous managers to achieve financial targets and navigate through challenges.
6. Financials
- What are the company’s historical financial statements?
- What are the projections for revenue, expenses, and cash flow?
- What are the key assumptions underlying the financial projections?
- What is the burn rate, and how long will the current cash runway last?
- What is the company’s fundraising history, and who are the current investors?
- All management accounts from the first day of the company’s operation
- What is the current accounting standard? Since the company started operating, has the standard changed?
- Copy of the latest audited financial statements and income statements
- Contact information for bankers of the company
- All company accounts including overdrafts or borrowing
- Sureties, indemnities or guarantees
- List of all payments and distributions made since the last accounting audit
- Liabilities or potential liabilities arising from an acquisition or divestment contract
- Reorganizations in the past and those that will take place in the coming year
- Copy of any contract to purchase or sell company shares within the last five years
7. Intellectual Property and Legal
- What is the status of the company’s intellectual property, such as patents, trademarks, and copyrights?
- Are there any pending or potential legal issues or disputes?
- Are there any outstanding debts, liens, or other financial obligations?
- What is the legal structure of the company, and are there any potential tax or regulatory issues?
8. Operations and Technology
Infrastructure and technology
What is the company’s current infrastructure and technology stack?
Technology
What is the scalability of the technology and operations?
Product development and commercialization
What are the key milestones and timelines for product development and commercialization?
Hiring
What is the plan for hiring and retaining key personnel?
What is the company’s culture, values, and mission?
9. Customers and Partnerships
- Who are the current customers and what is their feedback on the product or service?
- What is the customer acquisition cost and retention rate?
- What is the sales pipeline and conversion rate?
- Are there any key partnerships or strategic alliances, and what is the status of those relationships?
- What is the plan for expanding the customer base and forming new partnerships?
10. Risk and compliance
- Exist any events, acts, or circumstances which could cause the company to be in violation of any law or regulation regarding the health and safety or workers, the environment or any assets that the company utilizes?
- Has an officer or employee failed to fulfill any legal duty in relation to the company at any time?
- Do you have any disputes, past or present, with your current customers, employees or suppliers?
- Are there any litigation’s, arbitration’s, or allegations that employees or the firm itself are not in compliance with the laws and regulations to which it is subject?
- Do any judgments affect the company’s assets or business?
- What situations could result in the suspension, revocation, or non-renewal of a company’s licenses or permits?
- Does the company collect or use data that belongs to or is related to minors in any way?
- Confirmation of compliance with the latest Data Protection Acts
- Do you use third parties to process your personal data?
- Include a detailed list of all the computer software and hardware that is used by your company. Include copies of software licenses, equipment contracts and maintenance agreements.
- Information on disaster recovery and backup plans for information in the event of system failure or breach
- Information on the copyrights of the company in relation to software, source codes, and websites
- Do you know of any circumstances where the company could lose access to software or hardware?
- Do you have any disputes pending or past with third parties regarding the use of IT infrastructure by your company?
- List of all domain names registered under the company name, as well as the email provider. Include copies of contracts regarding website maintenance, hosting, and operation.
- All environmental, health and safety policies, procedures, and documents should be copied
- Do you carry out health and safety risk assessment?
- Include copies of any reports or assessments regarding environmental liability. Include any documents relating to health and safety compliance, as well as any environmental audits conducted on behalf or by the company within the past five years.
- Has the company ever communicated with any authority on health and safety?
The VC due diligence questionnaire may vary depending on the investor’s investment criteria and the company’s industry, size, and stage of development.
By addressing these key areas, a comprehensive due diligence questionnaire can provide investors with the necessary information to make informed investment decisions. However, it’s important to note that every company and investment opportunity is unique, and additional questions may be necessary depending on the specific circumstances.