Fundraising Due Diligence

Anyone who has seen Shark Tank, Dragon’s Den or any other show where millionaire investors put startup entrepreneurs through their paces is familiar with the concept of due diligence. The principle is that no rational person would ever invest money in an item or service that they don’t know about. This is why fundraising due diligence is so important.

Due diligence in fundraising is a process that involves gathering data and documents. It requires the founders to provide supporting documents to back up claims made during the pitch, demonstrate the operation’s nitty gritty, and reveal any investment risks that could be a concern. Knowing what’s expected in terms of gathering information can accelerate the process of fundraising and ensure that all the necessary documents are available.

While the scope of due diligence in fundraising is fairly well defined, the exact details vary according to a company’s stage of growth and the size of the round. At the stages of seed and angel the obligations on both sides of the table are small however, as a company moves towards series A, due diligence becomes more thorough.

An effective method is to develop a risk assessment rubric and devise a method for identifying the types of people who require additional research. Nonprofits, for example, should review their policies on gift acceptance to determine how they will screen out donors who have criminal convictions or scandals. Additionally, they could set up donor tracking tools that will flag up any media mentions of their largest donors in the event of newsworthy incidents.

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