Step 3: Diligence is Back, Be Prepared if You Want Investors

This is the third installment in our series, Raising Capital in 2023.  As we discussed in our first installment, Step 1: When Raising Capital Tell a Good Story, before anyone invests you need to pique their interest.  In the second installment, we talked about how to Step 2: Get Yourself Investment Ready.  The mission of steps 1 and 2 are to eliminate reasons for a potential investor to quickly say “No”.  The goal of Step 3, now that you have their attention, is to provide them with the reasons to say “Yes”.

Remember, most investors are looking at multiple opportunities at the same time and comparing one to another.  Preparing in advance and having your critical data properly presented is key to standing out amongst other investment opportunities. By utilizing an easy to access investment presentation such as the Trellis Digital Roadshow™, along with a detailed data room, potential investors can access, review, and analyze information with few distractions, this is the key to getting the investment.  In today’s market, unlike years past, you will find very few investors willing to write a check without thoroughly reviewing your investment opportunity. The line “Diligence is Back” seems to be heard more and more these days.  In an article I read recently, this line stuck with me, “If you have a line of investors out the door eager to write a check — sure, you can probably skip the data room.” (visible.vc) If not, continue reading to find out what you need to know!

 When it comes to investing in a new opportunity, both institutional investors and individual accredited investors will undertake a due diligence process before investing in your private or alternative investment.  As background, due diligence is the process of conducting a thorough investigation into a potential investment opportunity before committing capital. This process allows investors to assess the risks and opportunities associated with the investment and ensure that they are making a sound financial decision.  When investors conduct due diligence, they typically focus on several key areas. These include: 

1. Financials: Investors will closely examine the company's financial statements, including revenue, expenses, and cash flow. They will also review any financial projections to ensure that they are realistic and based on reasonable assumptions. The key is to keep them realistic.  Every founder or fund manager can see great success coming, but investors are more skeptical.  Don’t oversell or undersell.  Keep your projections real. 
2. Management Team: Investors want to know that the company has a strong and experienced management team that can effectively execute the business plan. They will look at the backgrounds of key executives and their track record in previous roles. If you are a non-experienced management team- reinforce your ability to bring a fresh perspective to your sector, or the team's capability to be agile and adaptable.
3. Market: Investors will want to understand the market opportunity for the company's product or service. They will review market size, growth rates, and competition to assess the potential for success.
4. Intellectual Property: If the company has any patents, trademarks, or other intellectual property, investors will want to review these to ensure that they are protected and have value.
5. Legal and Regulatory Review: Investors will conduct a review of any legal, structural or regulatory issues that may have an impact on the company's operations or financials.

Although these are the key items that an entity, be it a company or fund, should have prepared in advance for any investment, the need to go deeper will depend on whether you’re seeking to raise capital from institutional investors or private accredited investors.

Institutional investors are organizations that invest on behalf of others, such as pension funds, endowments, and insurance companies. Their due diligence process is typically more extensive and thorough than that of individual accredited investors, as they are investing large sums of money on behalf of others and have a duty to dig deep before investing. The process usually includes the following steps:

1. Screening: Institutional investors receive numerous investment opportunities, and they typically screen them based on a set of criteria, such as investment size, industry, and geographic location.  Technology like the Trellis Platform is designed to help these institutional investors screen and find diligence ready deal flow.
2. Initial Due Diligence: After screening, the institutional investor will conduct initial due diligence, which involves a high-level review of the investment opportunity, including financial statements, management team, and industry analysis.
3. On-Site Due Diligence: If the investment passes the initial due diligence, the institutional investor traditionally conducts on-site due diligence, which involves meeting with the management team, conducting interviews with key stakeholders, and reviewing company documents.  However, in today’s post COVID world, more and more of these meetings are taking place on Zoom or other virtual meeting systems.
4. Final Approval: After completing the on-site due diligence, the institutional investor will present the opportunity to an investment committee, who will make a final decision on whether to invest. 

Earlier stage investments or specialty funds often seek investment from private accredited investors directly or through Registered Investment Advisory firms (RIA) or Family Offices.  These investors meet certain financial criteria, such as high net worth or high income, and can invest in private securities. Their due diligence process is typically less formal than that of institutional investors, as they are investing their own money. The process usually includes the following steps: 

1. Initial Screening: Accredited investors receive numerous investment opportunities, and they typically screen them based on a set of criteria, such as investment size, industry, and geographic location.
2. Initial Due Diligence: After screening, the accredited investor will conduct initial due diligence, which involves reviewing company documents, such as financial statements and pitch decks, and conducting a high-level analysis of the opportunity.
3. Virtual Due Diligence – A Deeper Review: If the investment passes the initial due diligence, the accredited investor may conduct on-site or virtual due diligence, which involves meeting with the management team and reviewing company documents.
4. Final Approval: After completing due diligence, the accredited investor will make a final decision on whether to invest.

The main difference between the due diligence process of institutional and accredited investors is the level of scrutiny and resources available. Institutional investors have more resources, such as dedicated due diligence teams, and can afford to conduct more thorough and extensive due diligence. Accredited investors, on the other hand, typically have fewer resources and may rely more on their personal networks and experience.  The more prepared you are in advance, knowing the type of investor you seek, the better you increase your odds in hearing the word “Yes”.

Regardless of the type of investor, having a well-prepared data room is crucial to streamline the due diligence process for both institutional and accredited investors. It demonstrates a commitment to transparency, which makes it more difficult for an investor to say “no”.  By providing a detailed data room early in the process you can identify and address any potential issues or concerns that may arise during the due diligence process. This can increase the likelihood of a successful investment and avoid any surprises that could derail the process.  A fully integrated and detailed virtual data room, such as the one that is part of the Trellis Platform,can easily be created with institutional-level information needed by both institutional investors and individual accredited investors through the Trellis DataConductor™.

Both institutional and accredited investors undertake a due diligence process before making an investment- by understanding what investors look for throughout the process and providing a detailed data room, you can increase your chances of success and build strong relationships with potential investors.