The Due Diligence Microscope – How the Investors Examine the Company’s Management Team and Founders
Investing in a startup is like investing in a business
Although it may be tempting to make a quick buck, a startup can be an extremely risky investment. Ninety percent of startups fail due to a lack of product-market fit, poor management, or problems with the team. The risk of total loss is very high, so only invest if you’re willing to lose 100% of your money. Otherwise, it is best to invest in index funds, exchange-traded funds, or individual stocks instead.
When you invest in a startup, you’re basically buying a stake in the company. You’ll be given stock options and will typically be awarded a percentage of the company’s stock. However, you won’t actually own the shares until the company issues additional shares. In this scenario, you’ll own a portion of the company, but you won’t receive dividends. You’ll need to wait years before you’ll see a profit from your investment, so you’ll probably have to wait for some time before you’ll see any returns.
While deciding on a startup’s valuation is vital, there are several things to consider before investing. First of all, you need to figure out whether you’re investing in a business or an idea. Generally, a startup can take several years to become profitable. Because of this, investors need to be patient and have “holding power” to hold onto their investments for years.
You can invest in dozens of startups on SeedInvest, but some of these are restricted to high-net-worth investors. The average American has no retirement savings, so investing in a startup may not be a suitable replacement for them. Because of the risks associated with startup investing, startups are generally only available to accredited investors with a high net worth and substantial income. However, the amount you can invest is limited to 10 percent of your net worth, so you should stick to your investment budget.
While startup investing may not be the most traditional form of investing, it can be a very rewarding experience for both sides. It allows you to be hands-on while helping entrepreneurs develop their ideas. Many early stage startups will seek investment from smart money to raise funds and help them grow. In addition to investing in the company itself, smart money can provide valuable connections and advice that can help the business reach its goals.
One important aspect of partnering with angel investors is that they are different from other types of investors. Most investors want to see that a startup has a clear exit strategy. If they can’t sell it to someone else, investors will be less willing to invest. That’s why it’s important to consider how much exit strategy you can provide. Investors also want to see that the business has a clear exit strategy and plans for exiting the company. Looking investment for your startups.
Investors scrutinise founders and management team
With the recent Zepto coverage, it is no longer surprising to see Indian startup investors scrutinise their management team and the founders of their investments under a due diligence microscope. This recent spate of incidents has led investors to focus more closely on due diligence, fostering social responsibility among startup founders, and reaching under-served markets in India. But despite the importance of due diligence, only a small proportion of investors carry out the process.
Forensic due diligence focuses on the non-financial side of CEOs and founders of companies. High-profile promoters are prone to embarrassments, which can threaten the company’s future. Recent developments at BharatPe have stung investors and forced them to examine key executives’ background and track records. This process is based on extensive public domain research and intelligence gathered from personal and professional associations.
Grover’s comments add a new layer of drama to the already-tense situation at BharatPe. The former MD of the online pharmaceutical company has been under fire for his actions in recent months, following an audio clip in which he spoke to an employee of Kotak Mahindra Bank. He has also threatened to write to the company’s board asking that Koladiya be removed from the company. Grover also threatened to write to the Reserve Bank of India to have BharatPe’s banking and payment aggregation license revoked.
Due diligence is a complicated process, but the rewards are substantial. While it can be daunting to submit massive amounts of documentation and attend hundreds of meetings, the process can be an exciting time for a startup. When done properly, due diligence can help a startup move toward its next stage of growth. It should also help entrepreneurs prepare for the inevitable red flags that may come up during due diligence.
In addition to the financials, investors also want to see that the management team is knowledgeable in the industry. A thorough understanding of the company’s financial metrics is crucial in attracting investment. If the founders cannot articulate these metrics, their due diligence process will be delayed. This means that it may be necessary to hire a chief financial officer before the due diligence process starts. In such a case, the founders may want to hire an outside expert to conduct the due diligence process.
During due diligence, the management team must exhibit complete transparency. Any discrepancy during due diligence can jeopardize the deal. The management team must be forthcoming with investors about any patent disputes, pending lawsuits, disgruntled employees, and business mistakes. Transparency helps investors build trust and confidence with the management team. Investors will not rely solely on what a startup discloses about its operations, so they may interview current and former employees and customers to validate the information provided.
They want to know about key customers and vendors
As the Indian startup ecosystem grows, the due diligence microscope is turning a more serious focus on identifying responsible entrepreneurs and their potential to become sustainable investments. The scope of due diligence has been expanding to include checks on governance standards, business integrity, key customer and vendor relationships, and even sanctions compliance. However, due diligence is still a rare practice, with only a minority of investors conducting it.
For the most part, due diligence will not include calling or visiting potential customers. Nevertheless, the investors will want to see the company’s historical financial records, including its balance sheet, income statement, and cash flow statements. Angel investors will also look for glaring anomalies. It’s best to keep a clean audit trail of these documents and disclose any irregularities to potential investors.