Albert Shyy, Abhijit Banerjee, Hian Goh, Michael Smith Jr., and Ben Mathias talk about due diligence

From a startup’s perspective, due diligence is a tedious part of the fundraising process; it is not considered as fun as networking or as exciting as pitching. But due diligence is just as important – more important, you can even argue – because it could make or break the deal.

But what is expected from startups during this part of the fundraising process? And how exactly do investors see and approach due diligence?

We reached out to five Asia-based investors to find out more about their expectations from founders who are fundraising. They are Albert Shyy of Burda Principal Investments, Abhijit Banerjee of Decacorn Capital, Hian Goh of Openspace Ventures, Michael Smith Jr. of Seedplus, and Ben Mathias of Vertex Ventures.

Also read: Why M&A due diligence is so important: A cautionary tale

Not-so-bare minimum

All five investors agree that the bare minimum for due diligence is far from “bare”. Founders are expected to provide all the necessary data to support and validate their product or service. This gives investors a clearer picture of what they are and their vision for growth.

Albert Shyy | Burda Principal Investments
“Bare minimum for us to start due diligence would be a pitch deck plus financial model, so we can start to better understand their past performance and how they view the business growing/evolving post the fundraise.”

Ben Mathias | Vertex Ventures
“Investors primarily want to know: a) Is it a tough problem that you are solving? b) How are you solving it in a way that nobody else can? c) Is it a must-have solution needed by a large set of people or enterprises? If you have existing paying customers then should have them prepared to talk to your potential investors and explain why they chose you. If you are pre-revenue, then you should have all the information necessary to have these questions answered in a manner that the investor can understand.”

Hian Goh | Openspace Ventures
“For us there is no bare minimum. Be prepared that if an institutional investor wants to invest, they will do the full Monty. You need to prepare everything – all the legal, shareholder agreements, financial model, customer due diligence and reference calls”

Abhijit Banerjee | Decacorn Capital
“The preparation should cover gathering as much data and proof points from primary and secondary sources and tangible in-house data to support and validate the product…As part of the due diligence, investors also often request conversations with a company’s customers, past investors, co-founders, advisors, key employees and any other key stakeholders. Another critical area of preparation is to have the legal documents of ownership and investment terms like shareholders agreement etc. ready. That said, as startups are usually a technology play, their ownership of the IP (intellectual property) and clear plans for protecting it through proper IP lodgment, along with documentary proof of trademarks, copyrights and patents filed/granted if any must be kept ready for scrutiny.”

Also read: The hidden side of fundraising: how due diligence can make or break your deal

Michael Smith Jr. | Seedplus
“They should have a data room – virtual locker – ready to go. And the basic paperwork like founder agreements, employment agreements, relevant contracts SSA/SSH and a proper cap table.

The sheer magnitude of information that needs to be collected, processed, and shared between the startups and the investors is what makes due diligence a slow and tedious process. And since each investor may have different requirements, it would be beneficial for startups to heed the advice of ‘preparing everything’.”

Due diligence is a trust exercise

If the initial pitch is the introduction, then due diligence is dating. It is when startup and investor work on getting to know each other and explore potential fit with what each party is looking for.

When asked what they wish founders knew about due diligence, all five investors talked about the importance of easing the process and giving the correct information to build trust.

Hian Goh | Openspace Ventures
“One thing we always find people don’t do well is IP protection, IP searches, and patent due diligence. It always ends up holding up the process.”

Michael Smith Jr. | Seedplus
“Due diligence is not just a step VCs do to make work. It’s an important step to make sure the company is sound and ready for an investment. This is important for all the founders, employees, angel investors, current and future investors.”

Albert Shyy | Burda Principal Investments
“Trust and transparency are critical for investors – during due diligence various issues may arise that may not necessarily be show-stoppers, but if investors feel management is hiding certain issues or being untruthful to them, then it almost certainly kills the deal. I would much rather the company be open and honest about certain shortcomings in the business rather than to try to spin everything in the best light, as I don’t think it does us or the business any good if they aren’t being intellectually honest with themselves about the state of the company.

When we discuss issues that come up during DD the fundamental question we often ask is “do we trust the team?”, and it goes back to the sum of the past interactions we’ve had with the team and related stakeholders.”

Ben Mathias | Vertex Ventures
“Investors need to go up in front of their committees to justify an investment. For that, they need to have a thorough understanding of your business and can answer any question thrown at them by the investment committee. Founders should be fully transparent with both the good and bad of their business to maximise the chances of getting a “yes” from the committee.”

Abhijit Banerjee | Decacorn Capital
“Startup journeys are often on long and lonely roads which are seldom travelled. It is important for them to do this journey alongside investors who bring in more than just money and could walk alongside. Therefore, the one key thing the startup founders should also know is that due diligence is a two-way road; they should know how to conduct their own due diligence on the investor they are dealing with so that they don’t end up getting straddled with the wrong investors.”

Also read: The definitive guide to validating your startup idea

Due diligence is all about sharing information to build a strong, mutually advantageous relationship. Startups and investors should be able to fully focus on what the data says about the future of their partnership at this stage, and getting to know if their vision is aligned.

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