Anyone who has watched Shark Tank or Dragon’s Den, or any other show where millionaire investors put startups through their paces are familiar with the concept of due diligence. The idea is that person in their right mind would lay down money for an item or service about which they know nothing. That’s why fundraising due diligence is so important.
Fundraising due diligence involves the process of gathering collecting data and documents. It requires the founders to provide supporting documents to support claims made during the pitch, and also to demonstrate the operation’s nitty gritty, and reveal any potential risks to investment. Knowing what is expected of you in terms of gathering information will help you speed up the fundraising and ensure that all documentation is accessible.
The scope of due diligence for fundraising is well-defined, but the specifics can differ based on the growth stage of a business as well as the size of an investment round. At the stage between angel and seed the obligations on both sides of the table are small however, as a company is moving towards series A due diligence becomes more thorough.
A good practice is to develop a risk rubric and devise a method for identifying the kinds of potential donors that require further investigation. For instance, nonprofits need to review their gift acceptance policies and develop a method of screening out donors with known criminal records or scandals. In addition, they can install donor tracking tools that automatically flag any media mentions of their larger donors in the event of newsworthy events.