The Startup Chat with Steli and Hiten
436: Due Diligence During Fundraising
Aug 2, 2019
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In today’s episode of The Startup Chat, Steli and Hiten talk about due diligence during fundraising.

The fact is, no investor in their right mind is going to invest money in a startup that has sketchy numbers. Investors will want to know everything about how your business is doing and if you can give them the answers they need then that can kill the deal. 

In this episode, Steli and Hiten talk about what due diligence is, how it can happen, what fundraising is about and much more.

Time Stamped Show Notes:

00:00 About today’s topic.

00:36 Why this topic was chosen.

01:41 How due diligence can happen.

02:10 The problem with due diligence.

03:00 What fundraising is about.

04:07 How due scrambling during the due diligence process can ruin your confidence.

05:06 Why your emotional state is the most important thing to manage during the process.

05:44 Why trust is super important.

06:19 How problems can arise when you scale.

06:55 The number one thing that founders tend to neglect.

3 Key Points:

This is a place where, if you’re looking to raise funds, things can go wrong.If at any time you scramble during the due diligence process, it ruins your confidenceThe most important thing to manage during that time is your emotional state.

[0:00:00]

Steli Efti: Hey everybody, this is Steli Efti.

[0:00:03]

Hiten Shah: And this is Hiten Shah, and today on The Startup Chat, we're going to talk about due diligence during fundraising. One of the reasons we're talking about this, the main reason, is because this is a place where your fundraising, if you're looking to fundraise, can go wrong. It goes wrong because what happens is, you get into your fundraise, and it could be any stage, it could be a pre-seed round, a seed round, series A round, later on. You've got you know your term sheet and now you're like, okay, I'm going to sign this thing. You sign this thing, and then what everybody calls due diligence starts. That typically happens for most rounds. I think pre-seed, seed round, sometimes it doesn't happen unless you have a lead investor. During this period, basically your company is getting assessed almost in a different way. Again around everything that's going on in the business, whether it's some of the metrics that you have, if you have those, the money and how you've been managing it, and the cash flow and what's going on there, and whether the numbers that they heard from you a pre-diligence, or not even pre-diligence, but during the fundraise process, is actually true. Are those things actually what's going on in the business? Now, another aspect of due diligence is oftentimes, you have a data room, and you have a bunch of your financials there, you have a bunch of your case studies from customers, and you have a lot of your data there about your business, whether it's your retention or your growth or your engagement. That is already being shared with folks during the fundraising process even before term sheet sign. So there's a bunch of different ways due diligence can happen. Now, the problem... And then, Steli, I want to hear your take on some of this, because I think there's a lot of problems with diligence and where things can go wrong. One of the biggest problems is you just don't have that material all together. You're not ready. You're not actually ready to raise money if you're not ready for due diligence.

[0:02:11]

Steli Efti: Yeah, that's probably what's probably a really big problem, because what happens is, focus all your energy on fundraising. You focus all your energy on the story, on relationship. You start the process, and then when due diligence starts, you scramble. One of the things that needs to be kept in mind here is that fundraising, to a big degree, is about communicating confidently the story of your company, outlining the future of it,

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