Decoding Due Diligence for Founders

SDS 021: Decoding Due Diligence for Founders

Hey! thank you for reading issue 021 of Startup Definition Sunday (SDS).

SDS is the newsletter for founders, bringing you clarity one actionable tip at a time.

SDS arrives every two weeks (you guessed it) on Sundays.

In every issue you can expect:

• 1 Definition of startup jargon

• 1 actionable tip you can implement right away

• 1 article you should read

• 1 gift for founders

Let's dive in:

(P.S. I'll never sell your information, ever)

Hello there!

I'm thrilled to share this issue with you! In case you missed the last one, you can find it here.

Before we dive into today's issue, I want to inform you about something Marge and I started that we believe could be beneficial for founders - bi-weekly office hours to practice your 5-minute pitch.

Our Q3 sessions have concluded. If you missed the latest recorded session, you can catch it here.

We'll be taking a break until the beginning of Q4.

Now, let's delve into today's edition of SDS.

During my time in graduate school, Jesse Boykins III's ‘Earth Girls’ was on repeat for me.

The very first line goes: “They say women are from Venus.”

Sometimes, from a founder's perspective, an investor's viewpoint can feel as if they are from Venus.

This discrepancy is particularly evident during the due diligence process.

What is due diligence?

Due diligence: the comprehensive analysis that an investor conducts to evaluate a business's viability, growth potential, and overall risk before making an investment decision.

What does an ideal due diligence process look like?

There isn't a one-size-fits-all approach. Different firms have different timelines and processes.

However, they all share a common goal: scrutinize everything to ensure the investment is sound and promising.

While there isn't a universal ideal process, the most effective due diligence processes often have three key elements in common.

3 essentials for a winning due diligence process 

Organized data room and data collection process: During the due diligence process, investors typically request a range of information pertaining to financials, market size, product details, incorporation documents, and team information.

Having an organized data room simplifies the investor's diligence of your company. However, be prepared for some investors to ask for additional information beyond what is available in your data room.

A clear data collection process enables you to respond to these requests promptly while managing the operational complexities of being a founder.

Clear vision based on rational assumptions: Investors make bets on their future perspective of the world and the opportunities it presents.

However, this future vision must be grounded in rational and defensible assumptions. During due diligence interactions, investors will likely challenge all assumptions.

It will greatly facilitate the process if you can objectively demonstrate the rationale behind your vision.

Solid grasp of numbers: At its core, a startup is a business that offers goods or services in exchange for money. Investors aim to accelerate this process.

Investors primarily focus on the financials during due diligence. It is crucial for someone on the founder team to have a strong understanding of the financials and projections to address any questions that may arise.

If you have learned something valuable today, consider joining SDS so you don't miss exclusive sections in future editions.

If you only read one thing this week, read this...

In this edition of "Investing 101", Kyle Harrison takes us back to one of his previous articles, "A Tale of Two Markets".

Why should you read it? If you're a founder, this article provides crucial insights into the ever-changing landscape of venture capital. It highlights the importance of aligning expectations with the realities of the market, and underscores the potential costs of opting for venture capital funding.

Founder's Corner

As an investor, I know how challenging it can be for founders to get noticed by angel investors, especially without the right connections.

That's why I created an inbound form to allow founders to share their decks directly with me. It takes less than 5 minutes to complete. By breaking the mold and providing an alternative way for founders to connect with investors, I hope to help level the playing field.

That's all for today! As always, thank you for being a fantastic reader.

Until we meet again in two weeks, here's how we can stay in touch:

• 🐦 Find me on Twitter

• 💬 Hit me up on Linkedin

• 💌 Email me

• 🚀 Sponsor SDS (Reply to this email)

Let's chat again in two weeks,

Jasiel