Due Diligence Before VC Funding In Start-Ups

Due Diligence Before VC Funding In Start-Ups

VC Funding

VC  Funding
On February 17, 2016 The Government finally gave a definition to the word, ‘Start-up’. According to its notification, a start-up company will be recognized:

  • Till up to five years from the date of incorporation.
  • If its turnover does not exceed 25 crores in the last five financial years.
  • It is working towards innovation, development, deployment, and commercialization of new products, processes, or services driven by technology or intellectual property.vc funding

So any Company possessing these characteristics was called a Start-up. With the launch of the campaign, “Start-up India” by the NaMo government and various other initiatives, the idea of investing in Start-up Companies/vc funding  has become extensive.

Thus, with the rising demand of investing in start-ups comes the need for investors to understand the concept of Due Diligence vc funding, Due diligence, as the word suggests, requires for people to hold a standard of care before they invest in a business. It means that an investor should first evaluate the blacks and whites of the business before putting in their time, money and efforts in them.vc funding

To evaluate the INs and OUTs of a start-up, we answer the Three Ws –

1) WHO is the Team?

2) HOW is their Business Model?

3) WHAT is their Sustainable Competitive Value?

An idea may be wonderful. But the way it is implemented makes all the difference. The implementation of an idea is by the members who bring out the start-up. So, while investing we need to look at the capabilities and strengths of its team members. Remember, a bad team can lead to failure of the business.vc fundingventure capital fund

Thus, choosing your team wisely is an indispensible part of choosing which start-up to invest in. So, before moving on, answer the following questions about your team:

  • Is it their first start-up or have they done anything before too?venture capital fund
  • Their Education level and their knowledge of the industry they are venturing in?
  • How comfortable are they working with one another?
  • Any history shared between them?
  • Do they all belong to the same field of education or different? (Different is preferable since you could then have experts of all – marketing, technical, legal, commercial, etc.
  • vc funding

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Secondly, we look at their business model. A Start-up is formed to provide a solution to a problem. Here, we need to look at how feasible is the start-up as a solution to solve the problem and secondly, vc funding how many people will benefit from it i.e. how big is the market size of the business model.vc funding

Bigger the market size, more the chances of success. Besides this, always look into the start-up’s financial statements and legal documents to make sure it is not a ponzi scheme. Financial statements include Balance sheets, profit and loss statements, etc. while legal documents include Certificate of incorporation, meeting minutes, etc.venture capital fund

Thirdly, we evaluate their sustainable competitive value of the start-up venture capital fund. Before investing, every investor’s golden rule should be to study well the industry they are investing in. While doing so, they should assess the competitive factors in the market.vc funding

venture capital fund

Appraising as to how much competition already exists in the market or how much could be created by the launch of new companies within a few years is very important to gauge how much competition the start-up you are planning to invest in can stand. Also, investing at the right time is very significant part for your investment to reap a good harvest  with vc funding

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While answering the three Ws, the investor should keep in my mind that start-ups usually involve a lot of risk. vc funding Thus, they should be careful in investing and should never invest all their money in one start-up.

If you’re a first time investor, it is advisable you approach through angel investors. For a complete check list of due diligence while investing in start-ups.

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