How To Navigate The Due Diligence Process (2024)

Are you ready to survive the due diligence process for getting your startup funded or acquired?

You’ve built the framework of a high growth startup, maybe you’ve even got real customers and are turning a true net profit every month. Now you’ve got offers of more capital investment and perhaps even a merger or acquisition on the table. It’s time to sit back, relax and break out that bottle of champagne you’ve been holding for the day you really arrived, right? Probably, not yet.

The due diligence process is one of those dirty little secrets of the startup world. One that almost no one ever talks about. You can find volumes of content on growing a business, pitching investors, and negotiating term sheets. You’ll find almost nothing of any substance on the due diligence process.

There’s a good reason for this. As described in my book, The Art of Startup Fundraising,the days of the due diligence period have consistently been some of the most tortuous in founders lives. Most would rather give birth, have to run into a burning building to save a kitten, or have all of their teeth pulled. At least the pain would be over much faster. Few want to revisit those days. Much less share with the world how it really felt. It can be traumatic.

So, how can you navigate this challenging part of making deals happen in startup life? Is there any way to minimize the stress? How can you expect this process to evolve as you move through various funding rounds to an exit?

Graduating Through the Ranks

Maybe we should give startup founders colored belts or medals as they move up from one series of funding to the next. It certainly isn’t easy. Whenever, you champion one stage, then it can be a whole new experience and round of challenges when you begin to fundraise again. All the way through a merger or acquisition.

While the amount of time you may spend raising each round of funding may decrease as you grow, the level of due diligence required is likely to increase.

-Pre-Seed Stage:it’s all about you and your personal sales skills

-Seed Round:investors are going to want to start seeing decks, plans and research

-Series A:a lead investor may do the bulk of the due diligence that others will use

-Series B:each investor will want to do full due diligence themselves with a deep dive on

-Exit:extreme due diligence

To get a little taste of what you might be expected to provide, check out this free due diligence checklist from the Angel Capital Association. Just wait to do that until after you finish this article, or you may go blind and brain numb by the time you make it through all the documents listed.

How to Make the Due Diligence Process Easier

When it comes to an exit, you’ve really got to know what you are in for if you hope to come out sane. As well as having a plan to navigate the process skillfully to a desirable outcome.

Expectations

Having good expectations is half the battle. This isn’t just knowing the documents to be requested, but the process and the timeline.

Expect to have virtually daily calls with lawyers, people in your office digging through every shred of paper, and nonstop questions. Also be prepared for it to go dark every now and again. Being able to deal with that stress of just not knowing what it happening will be key.

One thing that will help, that many overlook is taking the time and asking the questions to really understand why they are acquiring your business. What do they want out of it? What will it do for them? Is it purely a money play? Is it to package your business for a bigger exit of their own? Is it growth to show their investors? Or just to take out the competition or gain your talent?

Have Your Paperwork Ready

Having all of your records ready in advance will make a huge difference in how much extra work and stress you are lumbered with. That goes all the way down to polishing up the resumes of your key team members.

I would recommend having the diligence room ready for review right at the time in which you are distributing your pitch deck with investors. Your diligence room will have all the documents that support your claims during the pitching phase.For a winning deck, take a look at the pitch deck template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash. Moreover,I also provided a commentary on a pitch deck from an Uber competitor that has raised over $400M (see it here).

Team Effort

Everyone has to keep working together as a team during this process. You need to be a cohesive unit. Have the same answers, and be working towards the same goals. This can be challenging as many don’t share what’s going on with their staff. When it comes to this part of the business your team also includes a great accountant, attorney, and probably an investment banker and consultant too.

Staying Focused

If the due diligence process alone wasn’t consuming enough, you’ve still got to be working your tail off or regular business to make sure your are hitting the numbers you promised, and that everything is still going in the right direction. You’ve got to master putting the blinders on to focus on these tasks at hand, no matter what distractions and games the due diligence process is playing with your mind.

Having a Plan to Deal with the Stress

You may not be able to fathom taking a vacation during this period in your business, even during the end of year holidays or when your wife is in labor and on the way to the hospital to deliver your next child. Yet, you will find it all far more tolerable if you find some balance.

Try to retain your perspective. Your business is not your entire person, family or life.

Have strategies to decompress daily and weekly. Maybe that is hitting the gym, swimming, golf, going to a comedy show, taking your kids to the park or hiking. Find what works for you.

Summary

There is very limited information out there for guiding startup founders through the due diligence process. That also makes it even more important for entrepreneurs to get educated and try to master this part of the cycle.

Despite how grueling it can be, a successful financing round or exit can be life changing, and still well worth it. Who knows, maybe you’ll go on to helping others with their startups as an angel yourself.