Anyone who has watched Shark Tank, Dragon’s Den or any other program where millionaire investors put entrepreneurs through their paces will be familiar with the concept of due diligence. The premise is that no person in their right mind would plunk down money for an item or service about which they know nothing. Due diligence in fundraising is essential.
Fundraising due diligence involves a process of collecting data and documents. It requires that founders have corroborative documents that support claims made during the pitch, demonstrate the operational nitty-gritty of the process and disclose any potential investment risks. Knowing what is expected of you in terms information gathering will help you accelerate the process of fundraising and ensure that all documentation is readily available.
While the extent of fundraising due diligence is fairly clear however the specifics of due diligence differ depending on a company’s stage of development and the size of the round. Due diligence obligations aren’t as strict at the angel and seed stage but they grow more arduous as a company advances towards series A.
A good practice is to develop a risk assessment rubric and devise a method for identifying the kinds of potential clients that require further research. Nonprofits, for example should review their gift acceptance policies to determine how they identify donors with criminal records or scandals. In addition, they can establish donor tracking systems that automatically flag any media mentions of their major donors in case of newsworthy virtual data room incidents.