This is the second post in a series focusing on how to simplify the investment process by Kenny Mumford and Claire Corbin. Part 1 of the series explains what term sheets are and how are used in the investment process.
Simply put, it is all the information an investor believes they need to review and get comfortable with to understand the value and prospects of a business before they invest.
After initial desk-top research or even third party reports, the formal process begins with a detailed Due Diligence Questionnaire. This is a set of fairly standard questions, which a company responds to with supporting evidence. Further questions may be asked to obtain a deeper insight into a point or seek clarification to help an investor “get comfortable” with the condition of the company.
If you have not experienced the process before, it is a good idea to familiarize yourself with an example or two. It will be time well spent! As a starter, here's an example of a document summarising the request for information needed in a due diligence request that we use here at MBM.
Conventionally this is led by the investor but if you are a company seeking investment, you could actually get a head-start by commencing your own internal due diligence well before you need investment.
Doing this may help you attract and secure that investment in future. You could, for example, build your system architecture around a Due Diligence Questionnaire. This will help maintain accurate, current and indexed records, not only for the purposes of providing it to a potential investor but also, simply as good housekeeping.
Indeed, there may be value in maintaining an in-house Due Diligence Questionnaire. You could then kickstart the investment process by presenting it - together with the supporting information - to an investor. Not only might this accelerate things, it will create a professional impression that will in itself to give comfort to your investors and allow you to control the starting point of the process.
Largely gone are the bad old days of huge files of documents being scoured in hard copy in a dusty basement (phew!). Due Diligence is now predominantly an online activity. Increasingly, the provision of evidential documents happens using a form of document sharing application.
Dropbox has established itself as a popular free platform. However, it does have some shortcomings; security, ability to print, share and amend documents, and version control amongst them. You could take the view that it is acceptable for small deals but for larger deals, applications that are more sophisticated are probably worth paying for. There are numerous other platforms available at a variety of pricing structures.
Even the most tech savvy investors will often ask for a lot of information by email. If this is happening, make sure that you maintain a separate file with all emailed information. It may become very useful later in the investment process. A blog on Disclosure will follow later in this series so watch this space!
It’s a team effort - between the company, investors and their advisers. It is a chance for you to show potential investors what it is like to work with you.
Did preparing in advance help you before your company's investment? Or do you wish you'd spent the time wisely compiling documents before the process started? Have you had any experience of an online document sharing platform you would recommend? Let us know in the comments below!