RECAP: Due Diligence 101: What Investors Really Want

Due diligence is an essential part of the fundraising process, but many entrepreneurs aren’t sure what investors expect of them — or what they should expect from investors. Business Funding Show’s latest event, ‘Due Diligence 101: What Investors Really Want,’ gave attendees an opportunity to learn from and connect with six due diligence experts from a variety of backgrounds. Here are some of the big takeaways from their talks.

Know that investors are evaluating your team, not just your idea.

Oliver Hammond of SyndicateRoom emphasised the importance of strong management teams, especially if your company is in the early stage with no financial history. Your team can be even more important than your idea, which is probably not as original as you think.

Oliver also encouraged entrepreneurs to answer two questions: Why now? Why your team? Good ideas can happen at the wrong time. (Facebook wasn’t the first social network, and Google wasn’t the first search engine.) Why is now the right time for your idea? Also, people before you have tried to bring your idea to life and failed — why will your team succeed? Ideas are only as good as their execution by humans.

On the other hand, ensure that the human element of your business won’t work against you. Roderick Beer of UKBAA suggested you be prepared for investors checking your social media for compromising photos or LinkedIn connections who can tell them more about you. They may also pose as a customer, just to experience how you treat your real customers.

Show that you’ve found people who can do what you can’t.

Your team doesn’t have to be perfect from the start. If it has any weaknesses, such as a lack of legal, financial or technical expertise, fill in the gaps by bringing on new people, Adnan Zaheer of PwC suggested. Investors will be at ease if they know that you are aware of your own weaknesses and taking measures to compensate for them.

Maintain momentum to hold investors’ interest.

Investors are busy people with changing interests. Once you have their attention, Roderick Beer of UKBAA advised, hold onto it with a constant, efficient stream of communication. If they request a document you don’t have, the longer you take to prepare it, the more likely the investors are to lose interest. Since you might be in contact with many investors at once, keeping a steady pace will require an organised approach.

Be organised and prepared in your data room and other documentation.

All speakers talked about the importance of organisation in both the documentation and the presentation of your business activity. As Jair Paula of RLC Ventures stressed, the more information you give investors from the start, the better. Some organisations, such as SyndicateRoom, will request all documentation at once so that nothing is lost in the back-and-forth of email chains.

One way you may be expected to present your information is in a so-called ‘data room,’ a labelled folder with your contracts, documentation, business plan, and more. If you send investors a nicely organized data room, said Roderick Beer of UKBAA, they will be put at ease and be ready to dig into it.

Use intellectual property as a business tool.

Some entrepreneurs want to avoid dealing with intellectual property (IP) rights by keeping their idea a secret. However, Thomas Prock of Marks & Clerk made it clear that secrecy has major limitations. If you’re able to keep it secret, he says, that’s even better than a patent. But there’s a problem: if no one knows about your product, no one will buy it. It’s also difficult to keep a secret forever. Eventually, employees and associates will probably blab.

Thomas encouraged entrepreneurs to consider IP rights a business tool. They have the power to:

• help you compete more effectively.
• create an extra revenue stream.
• provide a bargaining chip to get you out of a tight spot.

Consider these benefits, and you may find that the costs of dealing with IP rights are worth it.

Be honest.

Investors anticipate some exaggeration and bluster in a pitch, but they won’t tolerate dishonesty, warns Roderick Beer of UKBAA. Anything you try to hide will be uncovered during the due diligence process, and a lack of integrity is a sure way to lose their interest. Investors expect a business to come with some baggage, from poor credit reports to technical difficulties. Rather than trying to hide these issues, demonstrate that you are aware of them and are doing everything you can to minimize risk.

George Masefield of City Law Firm also highlighted the importance of informing investors of any ongoing legal disputes.

Don’t blind investors with jargon. Be approachable.

Technical language doesn’t make investors admire you or feel safe, said Oliver Hammond of SyndicateRoom. It makes them feel stupid. They won’t invest in something they don’t understand. You can avoid scaring away investors by writing all documentation in layman’s terms. This both helps investors understand your business and helps you market yourself as an approachable leader who can connect with people of diverse backgrounds.

Due diligence can be an intimidating topic, but all 6 speakers demonstrated how the process benefits both investors and entrepreneurs by helping them understand each other and begin a fruitful relationship.

Is grant funding part of your business finance plan? Come to Business Funding Show’s next event, ‘Boo! Don’t be Scared of Grant-Funding Applications!’, on 31 October at 6–9 p.m. at WeWork Chancery Lane. Tickets are available here.