Investors conduct due diligence during fundraising to ensure they are investing in a startup with the highest chance of success. It involves reviewing projections, financials and legal documents to reduce any losses that could occur. The purpose of fundraising due diligence is to give donors confidence in the founders of the business and the team they are backing.
The extent and depth is dependent on the stage of startup development, all companies should implement a thorough due diligence process for fundraising. This is an essential element of ensuring the quality of the company’s reputation and can prevent scandals from breaking after the investment has been made.
In the age of digital the news cycle is fast and can cause lasting effects on the image of a company. It is therefore important to have an effective screening process that can detect issues and prevent them from becoming public news stories or scandals.
The decision to invest in a company that has any reputational risk isn’t worth the risk. Similarly, fundraising due diligence research must be completed prior to when an investor invests their money. However, the sheer amount of time and effort required to conduct fundraising due diligence can often be prohibitive for smaller teams. This is where technology can be of help.
Researchers can save time by automatizing the process. They won’t need to look for lists of sanctions, or to identify red flags. This lets teams focus on identifying the most promising candidates and expand their network of potential donors.
