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How do investors and startups work together?

During the due diligence, venture capital investors work intensively with the startup and try to get an impression of the company. Specifically, this means that the investor reviews founding documents, articles of association, contractual relationships for third parties, annual financial statements, business plans, employee overviews, contracts with freelancers, but also patents and technical documents. In addition, the team dynamics and the strengths and weaknesses of the management team are tested and illuminated. That means: The VC just wants to know everything and look under the bonnet.

The due diligence can basically be divided into five areas

The investor pursues one goal: to gain a better understanding of the company and the internal processes. As a rule, he had three, maybe four, contacts with the founders. The Due Diligence starts the intensive getting to know each other. The investor should get a good feeling. He should be convinced: Here I give my money in good hands and assume that the company grows substantially and also like fast.

A look at the facts

The Due Diligence (DD) is mainly about the factual examination of the company. Investors clarify the question: is everything that the founding team has told us so far true? No one will mind if the pitch is rounded up a bit. However, anyone who has lied to the investor so far will hardly be able to get away with it in due diligence.

Especially in the early stages venture capital investors do not look at every little detail. Anyone who checks a startup as an investor during the DD, shoots through all the information he has previously requested and looks for deviations. If the first documents all sound well thought out and well-structured, he eventually stops checking the details. However, if an investor already finds mistakes in the first documents, he begins to look very carefully and question them.

Speed and thoroughness are essential

Apart from the purely factual examination, the due diligence has a strong psychological component. How fast do founders react to inquiries? How fast do you provide documents? Are these documents well structured? Are the documents conflicting? Or in general: Does the founder even have his numbers and thus his company under control?

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Those who react quickly and are well prepared for due diligence will most likely have a good handle on the company. And that’s exactly what the investor wants to check during a due diligence. So startups should be well prepared for the due diligence process, which will update the documents in advance and make them available in a Dropbox. It is best to create a dedicated due diligence dropbox for each VC – it is clear which documents have been disclosed to which VC.

When founders start to sort documents, when due diligence takes place, things get tight and hectic. As often happens, preparation is everything. During the process and the often parallel negotiations of the terms and conditions of the round of financing and the closing, you have enough other things around your ears – who only now starts to structure the documents, will soon have problems to come after.

Founder: Do a due diligence of your investors!

Founders can easily turn the tables and also subject their investors to due diligence. You can calmly question them about the cooperation with the portfolio and be direct: which startup from the portfolio has recently gone bankrupt? Which startup did the investor last remove from his website? And then talk to the CEOs of these portfolio companies. These will certainly provide valuable insights into the cooperation with the investor.

Especially in hard times shows the true character of an investor – if everything is great and running according to plan, the cooperation is usually easy. In the end, good cooperation will only work if both are sure: I will not be fooled by the other side.


Also published on Medium.

Published inStartups

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