What is Venture Capital due diligence?
Venture capital due diligence is to appraise the process of the current state of affairs of a company and its commercial potential. It is to acquire a deep understanding of the company, its management, liabilities, and assets.
Process of venture capital due diligence
1. Initial Screening
This is the first step to identifying the potential of the startup and to scrutiny. With the investment analyst and the founder coming in connection, the due diligence first stage begins. The process is informal. It is hard to know the evaluation extent. The VC firm considers the business plan of a company and its market opportunity. Thus, they assess the startup profile, consider the business acumen, and arrive at a decision.
2. Financial analysis
Financial analysis is to estimate the VC’s performance. It offers a review of the cash flow and income statement, balance sheet, revenue, projections, and expenses assessment. It includes a customer acquisition model, funding plans, and a debt-to-equity ratio. Founders provide complete and accurate statements, offering transparent accounting practices and policies, with well-reasoned forecasts.
3. Market research
The investment analyst considers the competition, market size, growth potential, and trends for the product to startup. Market research determines the product demand and tries to understand the due diligence process. Look for high-growth markets and for the significant potential to settle for a sweet spot. There will be technology changes, intense competition, and regulatory challenges.
4. Legal review
The venture capital due diligence process involves reviewing the legal and regulatory status of a company. It includes assessing the potential legal risks. The aim is to assess issues, contractual or legal, that may impact the investment value or its ability to operate effectively. The need to demonstrate the governance structure and to offer a clear understanding of intellectual property is mandatory. The startup should be aware of the legal requirements and the readiness to resolve pending disputes or litigation.
5. Reputation check and Management evaluation
The startup’s track record, its skills, and its management team should ascertain they have the expertise. They should reveal their business acumen to execute their business plan. Ask peers in the industry about their working experience and how to lead the company through expansion and growth. Reputation matters with changing and adapting to the business environment and market demands.
6. Customer validation and Technology assessment
The process of due diligence is the pivotal point in assessing the uniqueness, quality, and market appeal of a product. It is the ability to market the products and scale the operations. The product should cover the entire market segment and must meet the target customers’ preferences and needs. It is to confirm the validation process of the customers and to acquire users’ feedback. A technical examination involves software architecture, code reviewing, technology platforms, and hardware systems. It is to integrate user evaluation and testing in association with market research.
7. Report of Due diligence
The VC analyst prepares a report of due diligence summarizing the findings. They recommend whether to invest or not to the investment committee. They obtain understanding and success in deciding on investment and funding plans. Here an entrepreneur understands the things taking place within the VC world. They are aware of the process of due diligence and look for cooperation. There are many scandals about funds and misappropriation of top funds, but the VCs stay away. It is the reason a due diligence process is a must to follow at growing stages. Even reverse due diligence is crucial to appear professional and to enjoy long-term success.