Due diligence for the venture capital sphere includes a complete examination and the entire analytical process based on which managers of venture funds and companies make investment decisions. This article will analyze VC due diligence checklist.

The purpose of due diligence in VC deals

In the modern economy, venture capital investments are an integral part of the development of the country’s innovative potential. Venture capital (VC) investments are a priority in the development of state policy in the country, acting as a “safety cushion” for new companies entering the venture capital market: they provide strategic growth and development of the company by financing their innovative activities. Venture capital provides a financial link in the innovation infrastructure that unites capital carriers and technology carriers, and it is he who solves the problem of financial insufficiency in the sector of starting innovative projects.

Deal preparation is the most important aspect of the venture capital investment process. Over time, the importance of preparation has increased as VC clients have become sophisticated. After the company comes to the attention of the venture capitalist, the verification process begins with the help of the due diligence procedure. This stage is the longest in venture investing, sometimes lasting up to 1.5 years, and ends with a final decision on the production of investments or refusal from them. All aspects of the state of the company and business are considered.

The venture capitalist has to expand the scope and sources of information available to him. This is due both to the fact that an entrepreneur can be expected to embellish the real situation and to the fact that he simply may not notice the problems that are significant from the point of view of the investor’s interests.

The knowledge gained during the due diligence process allows the venture manager to shape the structure of the transaction by including clauses in the agreement with shareholders that can significantly improve the investment results. The information obtained during due diligence is important to convince potential partners to join the deal.

Due diligence checklist for the venture capital investment process

The starting point of due diligence is the business plan of an innovative project, while it is important to understand the motivation of all participants in the transaction, to determine the existing and planned sales markets, the nature of the competition.

Most of the work during the procedure is usually done in specially-designed Virtual Data Rooms. It is a secure digital platform, that provides useful tools for collaboration between contractors as well as a reliable data repository.

Of course, in each specific case, there are specific features of conducting Due Diligence in these conditions, however, there are general approaches to solving this problem. VC due diligence checklist includes the following aspects:

  • obtaining and analyzing information in the public domain;
  • organization of requests to various authorities;
  • initiation of a tax audit (subject to the possibility of further use of the information received);
  • obtaining information from competitors;
  • participation in the inventory process,
  • obtaining insider information from the takeover target’s employees who are loyal to the takeover company.

Based on the results of such a study, if a positive decision is made, an investment offer is drawn up, which summarizes all the conclusions and formulates a proposal for the investment committee, which makes the final verdict.

The report should include at least the following sections:

  • Introduction
  • Summary of analysis results
  • Company history and market position
  • Organizational structure and staff
  • Accounting Principles and Information Systems
  • Business results
  • Net assets
  • Flow of funds
  • Tax
  • Financial forecast
  • Other questions.