Today we’re going to look at some of the common due diligence topics investors will hone in on. The due diligence process can seem overwhelming for startups in need of funding, but knowing what investors care about is half the battle.
What do investors want to know when they are choosing startups to invest in?
What are the most common due diligence topics for investors? Here are a couple of things you can expect savvy investors to dig into:
“Founding team is more important than the idea itself”
Having a great idea is necessary, but when it comes to building startups and having a great company eventually, there are many factors that are essential. Lot of the startups overlook some or all of them and eventually end up failing. Perhaps the most important thing you need is a great team. Business plans are not simply road maps that will lead to the inevitable success of startups. Instead, they are guidelines, which will need to be adjusted to meet changing market conditions. Adaptation is a critical factor for success. Great teams are nimble and will recognize the need to pivot or change strategies. The future is not certain, but having a strong team will increase your chances at meeting unforeseen challenges. Investors need to believe in your team or they will never invest in your vision.
Product / Vision
You need to know absolutely everything about your product/company and why it will be able to compete with the broader market. Startups have to know their target market. Who is the average customer that’s using your product or service? You must have an intimate understanding of who your customer is and why they will use your product. To convey this, try telling a story about a “customer”. You need to be as specific as possible. Tell investors about a customer, how you know who they are, how you can find them, how you plan to interact with them, what they think of your product, and how they are using it.
There’s never no competition for startups!
Many startups think their product is so unique, they have no competition. You will need to know your competitors inside and out, how you are differentiated from them. Why will you succeed against established players or legacy products? Here’s a hint: there’s never no competition. You’ll always be competing against someone. You must know your competitive advantage, the existing barriers to entry, understand market price points, what risks and challenges you will face, and any underlying market trends.
Beyond understanding your customers and competitors, you must understand the overall market. This might not be as simple as it seems. First, you need to know the size of your addressable market. You must also be aware of any market trends or conversion. For example, is the market is currently undergoing some sort of product substitution or technological conversion? You might have the best product, but if the market is currently converting away from your technology or mythology, your company is doomed. There is a lot of startups out there, that are build without having a clear market need in mind.
Fundraising process for startups?
What’s important for startups? You’ll have to know how much money you need and specifically where each dollar will be spent. Articulate the key milestones you will achieve with the round and provide a roadmap for investors.
Fundraising for early stage startups can be a daunting task. However, if you understand what investors are looking for, and can speak to common due diligence concerns, you will greatly increase your chances for a successful process.