Posts Tagged ‘Investment’

If you’re a company preparing for a financing round in the near future, you should already know what is a Due Diligence (commonly known also as DD). If not, read on. If you do know what Due Diligence is, you might be interested how to do is cost-efficiently.

Wikipedia defines Due Diligence as follows:

Due Diligence is a term used for a number of concepts involving either the performance of an investigation of a business or person prior to signing of a contract, or the performance of an act with a certain standard of care.

Nowadays there are many kinds of Due Diligences, for example Legal, Financial, Technical, Commercial and Environmental. The scope of the Due Diligence will depend on the size and scale of the transaction and the surrounding risks.

We will focus here  on investment-round related Legal Due Diligence, and more specifically on Vendor Due Diligence which is done by the company itself in the preparation phase of the investment round. Due Diligence prepared for an acquisition is in many aspects similar to what we discuss here, but has naturally its own specific issues.

Legal Due Diligence focuses on showing that the future prospects of the company have a secure legal base. For example, it includes information about intellectual property rights (IPR) and customer as well as employee agreements.

Financial Due Diligence focuses on financial issues, and the most important of these usually fall into the categories of earnings, assets, liabilities, cash-flows, net cash or debt and management. In a typical investment round for a early-stage company these (historical) figures are often NOT the ones where the investment is based on.

Commercial Due Diligence is the process of investigating a company and its markets. It typically gathers information concerning published market information as well as information from customers, competitors and other market participants. While Financial Due Diligence is looking at the history, the Commercial Due Diligence is “forward-looking”.

Vendor Due Diligence is a Due Diligence that is made by the company itself. It’s often likely that your investors will make their own Due Diligence, especially if it’s about a larger amount of money. Vendor Due Diligence and a Due Diligence made by the investors are by no means contradictory. And as crowdfunding-style investment rounds are getting more popular, there is an increasing need for quality-evidence to be shown by the company. Vendor Due Diligence is very good for that.

In practise, a Vendor Due Diligence will be done with the help of a Virtual Data Room. It’s an online, secure storage which will help to store and process all the material, whether it is information filled with template or uploaded PDF’s.

By now you must already be thinking that there is no guaranteed quality in the Vendor Due Diligence. You’re right, and wrong as well. When done properly, the Vendor Due Diligence is completed by a verification by an external, independent lawyer. A properly made Vendor Due Diligence together with qualified verification is very valuable tool as part of an investment round.

We at Venture Bonsai have created a standardized and easy-to-use self-service, on-line Vendor Due Diligence process for small and medium-size software/mobile/Internet companies. You can complete it without extensive legal knowledge and have the information verified by your local lawyer. Its main purpose is to guide you through the most important aspects of the Due Diligence. It’s not fully complete, so to say, for that you still need to hire your lawyers. But the reality is that practically no companies looking for funding are doing any kind of Due Diligence so this will both help you to differentiate and find possible holes to be filled. If you’re interested, please get in touch.


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