The startup journey has some magical elements in it. This journey gives you breathtaking experience like roller coaster ride. During the ride, you will face many challenges and parallel to that you will learn to manage and mitigate risk.    While coping with diverse issues, you may step into stress and instability which may lead to cash deficit and an issue of availability of credit. When it comes to funding, startups generally feel forlorn. Complication begins with the search of investors.

Also Read: STARTUP FUNDING DEMYSTIFIED – STAGES AND SOURCES

Being a general startup, no investor finds investing reason in your venture. There are many snags which need to be overcome and remember each one is important thus, to be handled with care at the right stage. With numerous hindrances, when you feel that you are able to survive in the new world and coped up with all major issues then you must go through the checklist for Due Diligence process.

After reading the bold letters, if you think that your little talks are enough then you must stop then and there as you might be missing the most important essence of success. In case you do not agree with me then I am sure that the concept regarding the same must be hazy and here I will try to make it clear so that it does not become the reason for failure.

Due Diligence seems to be a heavy word but it simply refers to the care that a reasonable person should take before entering into an agreement or a transaction with another party. It is systematic research and verification of accuracy to ensure that all stakeholders associated with a financial endeavor have the information they need to assess risk accurately. For instance,

• In compliance, due diligence describes the degree of effort required by law or industry standard.
• In real estate, due diligence is the time period between the acceptance of an offer and the close of escrow.

For startups, investment is like icing on the cake. But as we all know that investors are antagonistic to risk and willing for returns. For a very obvious reason, they want security for their investment. For this particular security, they prefer due diligence. In this process, the ball is in the court of startups wherein they need to satisfy investors in all respect. During this process, startups need to build the same amount of confidence which they have in their venture. We can say that Due Diligence is Key to hassle-free funding.

Why investors prefer due diligence?

• Check the Internal Control Systems are in place or not
• To calculate the financial risk involved
• Historical financial statements and related financial metrics
• Projections of its future performance
• Judge the awareness of the business owners
• Assess the team structuring and Operational Processes in place
• Company’s technology and intellectual property
• Excavate undisclosed risks

What investors do in this process:

• Investor appoints a team
• Definite Mandate is set for the team
• Confidentiality Agreements are formulated between parties
• Due Diligence Questionnaire and checklist is prepared and circulated
• Investigation takes place
• Due Diligence Report is formulated and circulated

What needs to be taken care of:

• Secretarial practices should be in place
• Ownership of Intellectual Property should reside with the Company and not the Director(s)/Shareholder (s)
• Statutory Registers, Minutes and Resolutions are recorded timely and correctly
• State Specific licenses and permits have been obtained or not
• Proper record of all the filings with the Government department till date should be in records of the Company
• Internal Agreements and contracts between shareholders or directors should be reduced to writing
• All structural changes in company should be duly recorded with the RoC and should take place as per standard guidelines of the Companies Act, 2013
• Litigation issues, if any should be properly recorded and if possible sorted as early as possible
• Best to appoint an inspector internally to set everything in place before the due diligence check from the investor is due
• Employment, non disclosure and non-compete agreements duly signed by all part-time as well as full time If there are non-local employees, their legal employment status should be duly signed

Advantages:

• Updating of whole team
• Review and resolve personal distractions
• Visit reference customers, partners, and vendors to validate their satisfaction.

It is true that many startups fail to pass this test but few who clear it goes too far in the race. The habit of being persistent and putting effort in your work may be agonizing but it brings impressive achievements eventually. In the same manner, taking due diligence is tedious work but when you clear it, you will find a significant improvement in your venture. Thus, due diligence is fruitful for both the parties in its own way. The only thing is you have to keep patience and just try to be perfect in your deeds.

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