Due diligence isn’t a glamorous working task, but contrary to popular opinion, it’s incredibly important if you’re a startup founder, entrepreneur, or small business. It can help investors easily distinguish who is worth investing in and who isn’t worth their time or effort.
The whole process of due diligence can feel tedious, but it really doesn’t have to be. Breaking your processes down into smaller chunks or checklists can help streamline decision making and improve your business operations significantly.
If you have realistic investment goals that are viable for your startup’s current position, well thought out due diligence is your best ally you can have when looking to secure a cash injection.
So why do you need to prioritize due diligence? Let’s take a look at a few of the reasons:
Secure Investment Opportunities
Simply put, due diligence is the process that outlines your startup’s legal, financial, and technical grounds for securing investor support. Is it really that important?
Almost 50% of startup investments fall through due to improper due diligence. That’s a pretty scary figure, but it doesn’t have to be if you’re prepared. Anticipating the kind of paperwork requests you’ll get is half the battle, as this will help you quickly deliver documents to your potential investors, buyers, and clients.
The ability to earn investors’ trust is definitely grounded in having the correct documentation. The most common examples of requests are, operational procedures, financial profiles, and growth projections.
Having due diligence processes and documentation can seem like an unnecessary step and drawing your focus away from growth, business tasks, tracking accounting, or developing a marketing strategy.
The good news is that implementing due diligence in your business is probably easier than you may have thought. You can rely on accounting tools that come with essential features such as a balance sheet, general ledger, trial balances, and a chart of accounts. This will make it much simpler for you to instantly see where
As the old idiom goes: fail to prepare, and you prepare to fail. This is even more accurate in the investor space. There is no doubt that having a grasp on your documents will lead to more success in securing investments. It’s not a golden ticket, you’ll still need to put in the hard work, but it will help remove doubt or potential speculation in the investor’s mind.
Have Easy Access to Your Important Documents
Staying organized and being on top of your finances is even more important in the wake of the coronavirus, and how startups are responding to COVID-19 brings hope for the future of small businesses.
Having your paperwork in order is even more important when you can’t have in-person meetings and rely much more heavily on virtual meetings and digital communication. But the ability to hop between calls in seconds rather than travelling is definitely not to be overlooked.
Ensuring your documentation is easily accessible will pay dividends in a number of ways, whether it’s an audit or a funding pitch, but understanding potential digital security threats should be considered too. Granting individuals the minimum access needed to do their job sufficiently lessens your chances of data breaches, which predominantly come from human error.
Be Aware of Your Flaws
The world is really changing and evolving into the digital age. As a startup founder, you need to understand your due diligence documents and apps, as they can allow you to spot potential issues or red flags with your business.
The idea is to see your startup from a potential investor’s point of view. Security testing of applications and APIs, no matter which tool or method used, all comes down to dynamic or static evaluation.
Interacting with the application as it runs, could mean manual penetration testing, using an automated dynamic application security testing tool. DAST tools in particular are very effective because they analyze requests to learn how your applications are used. Automation only begins once the DAST has seen all of the pages of your application
Having a clear overview of your startup and its vulnerabilities and weaknesses can have additional benefits such as protection against startup targeting cybercriminals or potential new ideas or solutions.
Transparency & Explanation Prepping
Directly linked to the above point (and this may seem counterproductive in some instances) but it’s a core part of a startup business: you want to be transparent with your potential investors, it is an essential part of due diligence analysis.
Being transparent can help you build trust early on and alleviate potential issues or misunderstandings further down the line. Making sure you prepare explanations for different situations such as a large one-time purchase can keep you ahead of the game and stay proactive, not reactive.
Failing to disclose information can be seen as misleading and will do nothing for your relationship with your potential investors, so honesty is always the best policy in these scenarios. When you and your team embrace working transparently, you open up a new level of team cohesiveness and will keep you all on your toes, any issues will be easy to spot and easier to resolve.
Ultimately, investing in a culture of transparency will flow through your startup and provide a wealth of benefits, and moving forward will improve your investment chances and growth potential.
Conclusion
These processes can be a little overwhelming in the beginning but you will reap the benefits of early adoption for your startup later down the line. Don’t let these files become an obstacle, and think of them more of a step towards a digital skills transformation at your business.
Regardless of the success of your investment pitch, having detailed breakdowns of your financial, technological, and legal portions of your business will always be useful to have. Taking the time to streamline, organize, and simplify your due diligence will help you become more prepared and ready for whatever the future brings to your company.