There has been much written and discussed about the due diligence process investors conduct on the companies for which they are considering an investment. Someone once described this process as 'opening the kimono'. The investor check list covers everything about the company and the kitchen sink including corporate compliance records, finances and taxes, employment and labor issues, business contracts, intellectual property rights, and litigation concerns.
Before you enter into this process with an investor, as a start-up CEO, you should do your own due diligence to make sure you are talking to the right investor. The key message: Beware. Not every investor is ideal for your business.
Here is a handy check list to can guide you through your search for a potential investor. Above all, do your homework. Know what you want from an investor and the types of investors in the marketplace. And absolutely examine their past and current investments, much of which can be found with simple searches via Google, LinkedIn, company websites and available government filings, and take the time to speak with companies they've invested in.
Pre-Meeting Checklist: 10 Questions That Need Answers
When considering a venture capital (VC) firm as an investor, be sure you know answers to these key questions:
- When was the fund established and how much do they have left to invest (funds not committed)?
- When was their most recent investment and how much do they typically invest?
- How many of its portfolio companies are in your market space? Does the individual you would be working with (the one taking a board seat) have domain knowledge in your space?
- How many of its portfolio companies have had successful exits?
- How many of the portfolio companies still have their founders involved?
- Does the investor have a minimum investment amount they usually invest? Are they a seed, A, B, or C round investment firm?
- Was there only one initial investment, or do they make follow-on rounds? How much time passed between investments?
- Does your target VC co-invest with anyone? Do they act as a lead investor?
- Does the key investor -- whether an individual angel or venture capital partner -- have actual operating experience?
- What do the portfolio companies say about working with the VC firm?
After you have completed your inquiry, take a step back and ask: Is this someone you wish to marry? If not, move on. Trust your gut. Avoid forcing a situation to fit. If, however, you can see yourself spending the next 3 - 7 years in financial bed with this investor, proceed with caution. But remember, this is your company. Your future. And your opportunity to partner, grow and succeed. Be sure there is mutual attraction between you and an investor.
The next blog post offers you the top 10 questions every CEO of a start-up should ask an investor.
Co-founder of Austin-based Growth Acceleration Partners (GAP), Joyce Durst is driven to help software companies achieve rapid growth through business-focused applications. Joyce has launched startups and led teams at enterprise companies by applying her passion and business knowledge to efficiently create software that solves business problems. Active in the community with Special Olympics and Springboard alumni, she enjoys helping other women in technology to achieve their dreams.