Investment Due Dilligence Checklist
We have put together a list of areas you should look into / ask the founders for, before making an investment. This list is not exhaustive by any means, and at the end of the day your decision to invest will be very personal, however having some structure can give you a good start.
STEP ONE - Before going any further, ask yourself:
Does it meet my investors thesis?
Do I understand the vision?
Do I like the founders?
Do I like their storytelling?
Are the deal terms reasonable?
STEP TWO - Deep dive into the details:
Is the founding team capable and driven?
Are they solving a real problem? Is there real market need? What validation is there to back this up?
Does the company have the right initial strategy for selling to the customer and a plan for doing it at scale?
What is the status of IP applications (if relevant), what is protectable or what are their barriers to entry?
Will the company have a long enough runway (time until they run out of cash) to keep them going until their next fundraise or break-even point?
What did the company raise previously at what valuations? What does the ownership look like today?
Looking at the financial model: what are the founder’s key assumptions?
Do they have a clear and focused roadmap of activity for the next 12 months?
What is their long-term model for funding, how will this impact investors in this round?
Who are their current competitors and what might the market look like in 5 years?
What is the long term potential for the company based on the addressable market opportunity today and in the near future?
What is the exit potential & timeframe? i.e 10x in 6 years
How do the deal terms and exit opportunities combine to produce a reward that justifies the risk of an early stage investment?
Remember: early-stage businesses will be works-in-progress, you’re not trying to find a perfect company. In reviewing the business you’re simply trying to understand: what has been validated, what is the potential if it works, and what are the risks? Once you are clear on this, you’re then deciding: am I willing/comfortable to accept the risks.
STEP THREE - Check important documents
Company Registration Number
Registered address
Trading address
Financial model
Forecasts for at least 3 years
Historical management and/or audited accounts, if applicable
For the Directors and any shareholder owning more than 20%: details of special investigation in the past ten years, or current special investigation by any regulatory body, government body or other authority, or conviction of any criminal offence (other than motoring offence)
List of current shareholders and their holdings
Current Articles of Association
Shareholders Agreements
Any other agreements that control or influence the running of the Company
Details of any pending litigation
Intellectual property schedule together with details of any patents, trademarks, copyright that are material to the business, ownership of such IP, and details of any licences, licences etc
Commercial agreements (both in place and pending) with customers, partners and suppliers
Details of any leases or rental agreements for any premises
Copies of contracts of employment and director’s service agreements
Details of banking or other financial arrangements together with any loans, mortgages or other borrowing arrangements in place or anticipated
A statement of affairs with HMRC/ with other regulatory bodies that impact the business
Advance assurance for SEIS / EIS tax relief (if investing under these schemes)
Whilst you might outsource some of the technical due diligence, there is no substitute for doing your evaluation. Talk to people they work with, talk to their customers - do your homework. It's also a good idea to meet the founders in a relaxed setting and get to know them as individuals. If you like the idea but you don’t like the people - walk away.
At South East Angels, we collaborate on due diligence as a group to ensure the highest quality evaluation while sharing knowledge and reducing blind spots. After which, each member makes their own independent investment decision. Learn more about our membership.
