Building a startup or scaling a company is no easy task, and an essential part of this is fundraising. As your company grows, you will come to see that raising capital is a bigger part of your job description than you think. This does not only happen during the early stages either, as many companies raise more capital to scale to new markets or make acquisitions when they are more established. Remember, fundraising never sleeps.
One of the most important parts of your upcoming fundraising is the due diligence process, where you share important company documentation with investors. Exactly what this entails, though, is much more difficult to discern. Consider the different requirements for an early stage startup, just out of the gates with a minimum viable product and a few founders, compared to a more established growth company with 20+ employees and presence in several international markets. It is only natural that the aforementioned startup does not need to provide the same material as the latter – they simply don’t have that type of documentation available yet.
Any expectation for a due diligence and documents to share always needs to be seen in context with the company that is raising funds, so we have set up a quick guide to what you could expect when you are preparing your company for raising capital. While these lists may not be exhaustive or complete compared to what you encounter, they can hopefully help you prepare for what type of documentation is likely to be expected for the different stages.
Soft due diligence – for early stage startups raising funds
When your company is still in its early stages, where the first product has just come to market and the team mainly consists of the founders, it is natural to expect a softer due diligence process in your initial rounds. Of course, if you are raising capital from larger, more professional investors these requirements will increase, but if you are raising such a round from angel investors the due diligence process is likely to be simpler.
In these early stages, the documentation is sparse and raising capital is largely based on the trust that has been built up between you and the investor network that you established. As such, the documentation supplied in the due diligence is often centered around the investor pitch deck and the investment legal documents. A good place to start from is the following documents.
Soft DD documents:
- Investor Pitch Deck, including founders Bio
- Forecast /cash flow
- Shareholder Agreement
- Articles of Association
- Verified annual accounts
- Notice of general meeting (if relevant)
Additionally, you need to provide the investors with an application or subscription form, where they commit to the investment sum and provide the information on the legal entity that is formally investing. To read more about the process, you should check out our Fundraising Playbook.
It could also be wise to share an operational update during the process, allowing your potential investors to keep track of the traction even after the round is launched. This is especially true if you can share some good news during the subscription period, as this could provide any on-the-fence investors to make the necessary leap.
Finally, it is worth remembering that you should always strive for transparency. The simplified nature of the due diligence in these early stages is more the result of trust-built fundraising and limited documentation than anything else, so if your investor network asks you to provide additional information you should always do so gladly!
The traditional DD – for company’s raising growth capital
As your company is growing and you are preparing for a larger fundraising, the amount of documentation expected by investors in the evaluation process will likely be more comprehensive. Even further, it is likely that the different potential investors require different information, leading to a much more complex due diligence than in our previous example.
Despite this, it is reasonable to assume that a lot of the information will be based on the same underlying areas, if not even the same specific documents within that area. It is likely that you will be given a due diligence checklist by the potential investors, and the last thing you want to do is be unprepared.
Based on several due diligence processes that our customers have been part of with OwnersRoom, we have set up some of the broader areas for which investors usually seek information in these more traditional due diligences, as well as some example documents that you should expect to provide for each area.
Traditional DD folders and areas:
- Pitch deck, corporate strategy, markets, IPR, etc.
- Verified financial accounts and associated audit reports, cash flow financial model, etc.
- Product and Technology
- Product overview, technology, usage data, IP, etc.
- Sales and Marketing
- Sales and marketing overview, metrics and unit economics, sales contracts, etc.
- Customer success and support (implementation)
- Customer success overview, metrics and unit economics, etc.
- HR and Legal
- Org. chart, employee contracts and bio’s, external contractors, etc.
- Option grant overview, information per grant, etc.
- Board and Shareholders
- Updated cap table and history, board documents, general meeting documents, articles of association, shareholders agreements, etc.
- Grant overview, information per grant, etc.
- Deal documents
- Investment agreement or subscription forms, closing memorandum (if applicable), board or general meeting minutes, new shareholders agreements, etc.
- Structure of data room overview
It is also common to gradually expand the data rooms during the due diligence process, as new questions arise from the investors based on the information provided. This list is, as mentioned, not necessarily either exhaustive or a correct setup, but rather a collection of common areas and documents based on what we have seen and heard from customers we have spoken with.
How to prepare for a fundraising
As your company is getting ready for fundraising, a natural question that arises is how to best prepare for the coming due diligence. The reality is that a lot of the extra documentation will be requested as the data room is being set up, meaning that the best thing you can do in the meantime is to focus on running your business the best way possible.
However, if you strive to be transparent and share documents and updates over time with your investor network, a lot of the due diligence will already be done when the process starts. Ultimately, it is important to remember that fundraising for startups and growth companies in general is based on relationships, and building your investor network and the necessary trust and engagement over time is the best way you can prepare your company for a smooth due diligence and fundraising.