Publication number: ELQ-49321-1
View all versions & Certificate
How to Conduct Due Dilligence on your Potential Investors
5 Steps To Due Diligence On Your Potential Investors
Introduction
Even though the color of their money is always green, all startup investors are not the same. Struggling entrepreneurs are often so happy to get a funding offer that they neglect the recommended reverse due diligence on the investors. Taking on equity investors to fund your company is much like getting married – it is a long-term relationship that has to work at all levels.
Investor due diligence on a startup is not a mysterious black art, but is nothing more than a final integrity check on all aspects of your business model, team, product, customers, and plan. Reverse due diligence on the investor is a comparable process whereby the entrepreneur seeks to validate the track record, operating style, and motivation of every potential partner.
If all this checking sounds a bit paranoid and unnecessary, it may be time to take another look at some questionable investor practices and onerous term sheet requests. Beyond the technical issues, if the chemistry isn’t right, the impact on your startup and future business is likely to be similar to that of a bad marriage. It’s no fun for either side.
Thus, here are the minimum steps that I recommend to every entrepreneur in completing an effective reverse due diligence effort:
- Step n°1 |
Get a perspective from peer investors
Of course you need to discount any investor competitive positioning, but local investment group leaders will quickly tell you the strengths and terms of active investors in your area. If your investor is unknown, or peers offer no positive attributes, take it as a red flag. A sample of three views is adequate.
- Step n°2 |
Personally visit another startup funded by this investor
Through networking with other entrepreneurs, you should find one or more to visit that have relationships with this investor. Another approach is to ask the investor for references, where their involvement has made a real difference, leading to success.
