When looking to raise capital via various forms of funding – be that convertible loan notes, debt, ICO, grants, SEIS or EIS funding, equity or otherwise, it’s imperative that you do your due diligence. Connecting to the right type of business to source such funding is a pre-requisite, as is agreeing upon what the options to manage shareholder value are and the commercialisation strategy.

Venture Capital Due Diligence

Very simply, if you’re at the point when you wish to invest in a company or buy it outright, you need to have all of the relevant information to hand before sealing the deal. Sounds simple enough, right? Then why do so many companies and individuals not do their due diligence at the outset?

Due diligence should encompass every facet of the company so that there are no surprises along the way, whether that be initially or further down the line. 

Debt, Equity and Convertible Note Structuring

An investor receives equity in the company having decided against a return of principle amount plus interest. The convertible note is therefore a short-term debt which converts to equity normally at a future financing round. Investors are given the advantage of determining the value of a company when they may not be that much data for them to go on.

Convertible Note Terms

Keep in mind the following:

Discount Rate

Compensation for early investors =representing a discount you receive relative to investors in the subsequent rounds.

Valuation Cap

Caps the price at which notes will convert into equity.

Interest rate

Interest accrues on the principal invested, and the number of shares issued increase upon conversion.

Maturity date

Date on which the note is due. The company must repay it at this time.

Investor and VC Due Diligence

It’s quite obvious that investing in early-stage companies is risky, so the due diligence process will ensure that venture capitalists correctly evaluate any potential investment opportunity.

3 Stages of Due Diligence

In general terms, the three stages of due diligence are:

  1. Screening due diligence
  2. Business due diligence and
  3. Legal due diligence

Stage 1: Screening due diligence

Remember that investors will see hundreds if not thousands of potential investment opportunities, and screening allows them to quickly identify whether they wish to look at the potential investment in more detail (stages 2 and 3).

Stage 2: Business due diligence

If the process reaches this stage, companies can assume that the potential investor is serious. This is the point where the actual potential of the investment is ascertained, and the viability of any potential investment/return. If VC’s remain interested, the process moves on to stage 3. 

Stage 3: Legal due diligence

A lawyer will complete a legal review for the VC and the company lawyer must make themselves available in return. Conversations and dealings should be open, honest and transparent. At this point, there is every chance that the deal will be made – don’t blow it!

Venture Capital Due diligence Tips

Tip #1- Dedicated Point of Contact

It’s worthwhile ensuring that the company has one dedicated point of contact for responses to the VC thereafter. It allows a relationship of trust and co-operation to be built, which is vital to the success of any tie-up.

Tip #2 Get Due Diligence Binders Ready

If the company is able, prepare due diligence binders and materials in order to speed up the review process. 

Tip #3 Be Answering

Always be prepared to answer every question as honestly and openly as possible, and always respond in a timely fashion. Any hint of unprofessionalism at this stage could be fatal.

Tip #4 Focus on positive outcome

Don’t give a VC the opportunity to back out of or renege on the deal purely because of a perceived unwillingness to co-operate.

Tip #5 Take Feedback

Ensure you listen to, and act upon, every piece of feedback received from a VC or investor – positive or negative. This will help in future deals of a similar ilk.

Transaction Management

This relates to the practice of managing IT from a business transaction perspective.

IT infrastructure and visibility of transactions across the infrastructure can, and should, include dynamic mapping of the application topology. This allows for correction and detection of changes in technical or business conditions. For example, incorrect data values, application exceptions and/or stalled transactions.

Transaction management is designed to be proactive, ensuring the effectiveness of the IT infrastructure during business transactions such as those detailed.

Connecting Businesses to Sources of Capital Funding

1. Bootstrap your business

Investing some of your own money is helpful when pitching to get investors to partner with you. There is an inherent risk with any start-up but if you’re all in, that’s a good signifier for anyone else. 

Think outside the box when it comes to funding your own venture.

There are plenty of 0% credit cards as a start point, just be wary of not over-extending yourself in terms of credit. Research the most favourable lenders and do your homework.

2. Launch a Crowdfunding Campaign

Some people see crowdfunding as a bit ‘niche,’ others may think of it as a gimmick.

The plain fact is that you’ll be engaging with a much wider audience and you’ll see from the get-go whether your idea or product is of interest or not. 

Remember that the video you shoot for your crowdfunder is effectively your pitch.

Keep it informative, professional and well edited. Any potential investors on this type of platform will make up their minds about you and your company simply on the strength, or not, of this video presentation.

3. Apply For A Business Loan

Before applying for a small business loan, make sure to prepare any loan documents you’ll need to show ahead of time.  You’ll be asked to show a profit and loss statement, balance sheets, tax returns and bank statements. In some cases your personal information may be checked as well.

4. Raise capital by asking friends and family

If you intend to approach friends and family for funding, be absolutely sure what form the funding will take – eg equity in the company or a loan. Involving those closest to you is a serious business and you must be clear from the outset as to the risks involved. Treat them as you would any other investor. Just because you know someone shouldn’t mean they’re treated any less favourably or professionally than anyone else.

5. Find an angel investor

Angel investors are those with a net worth that exceeds £1m or annual salary of over £200,000.

They have money to spend but do your homework.

Why would they be the right fit for your company? What do they bring to the table other than funding? Will they seek to team up with other angel investors and if so, is that something you would be happy about?

6. Get investment from Venture Capitalists

VC’s will almost always invest in slightly more mature companies, but this means they’re more likely to want a bigger say in things. Your pitch is crucial to obtaining funding of course, and with VC’s looking for decent returns for their fund, your business has to be scalable. Don’t bother heading down this route if you don’t meet those requirements.

Regardless of your business size and complexity, WGP Global provide our clients with solid business advice and connection with the right and proper types of capital, combined with 40+ years of professional experience and an international business network. You can rely on us to deliver. Get in touch with us at hello@wgp.global.

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