Thursday , 20 September 2018

What is Due Diligence? Best Practices For Better Evaluation By Investors

When you set out to, do something or buy something, You would definitely analyze it with a very sharp view. Won’t you ? Same is with an investor, he analyzes and evaluates every detail about the company or startup before heading towards the investment. The evaluation process is also called as diligence practice or process, which is necessarily carried out by an investor before making the crucial decision. Diligence process helps an investor seek answers to all the questions associated with the growth, model, company, projects and many other metrics. Due diligence is framed by an investor according to the type and nature of the company.

What do you think are the elements included in the due diligence process or frame ?

What is Due Diligence Best Practices For Better Evaluation By Investors

Well.!!! The five important elements which an investor should consider or desire’s to consider before making an investment are:

  1. Traction: Does the company has the scope for upward revenue progress or Will the company adopt products that have a good value proposition?
  2. Expertise: Presence of domain expertise to give timely updates after investment.
  3. Value: Does the company have compelling benefits to pull the attention of several other target companies.
  4. Investment requirement: They would definitely want to know if the company has the ability to raise the next round of funding.
  5. Team: Does the company has a potential team which can help company progress in the near future.

But, what if you are a startup ? As you would not be able to furnish the things that are required for due diligence. When that is the case, all you can do is take necessary steps to project the financial statements of the startup. Make sure you project your statements with all the basic elements of finance like the balance sheet, Income Statement, Working Cost, Financial Ratio and Statement of Cash Flow. As this would help the investor understand your projection and planning ability. Financial projection is crucial as it also displays your insights and logic with respect to the model of the company.

Investors Meaning of “Due Diligence”:

Every entrepreneur despite having the potentiality to maintain a good pitch fear an investor’s due diligence process or practice. Because getting through the due diligence process is a challenging task. This process brings out all the positive and negative attributes associated with the company or the enterprise. The main motto behind this process is to valuate and calculate the risk associated with the mainstream business. So that they can make a useful decision.

General Question Posed By An Investor:
When an investor evaluates the company or startup, he would definitely ask you several questions to know what you are. The questioning process assures him about his investment decisions. He decides whether you are the right choice to head with or not.

Example:

  • What is your marketing plan?
  • Who is your target audience or market?
  • What is the ultimate goal of your product?
  • What is the sort of change you desire to bring in the market?
  • How can a customer use your product beneficially?
  • What would you appeal your audience or customer?

Well..!!! Now you would have clearly understood the aim of diligence process. It aims to find an answer to all the above- mentioned questions. So, an investor can come up with a better decision.

Practices Involved In The Due Diligence Process Are As Follows:

1. Assessment Of Different Areas:
The different areas in the business include product, market, finance, team of individual etc. The investor overviews all these key areas to understand all the attached facts and figures. Assessment helps him know the investment tenure. Above all looking into different areas lets him know the risk factor involved in each of it. After all, investment calls to deal with risks.

2. Market Analysis:
The ultimate destination of any product or service or any other outcome of a company is the market. And an investor analyzes the market by focusing on every petty detail regarding the customer like who they are, what they actually want, does your product really offer a solution to their problem, and the quantity of customers. Along with that, they also strive to identify the techniques adopted by you to identify, locate and target or reach the customer. And only an appealing result can make the investor feel comfortable and safe.

3. Financial Projection:
Financial projections are important so that they can assess the funding requirement, be it short- term or long- term. It also helps him evaluate your company’s strength and stability. With this result, an investor identifies your milestone and goals to make decisions accordingly.

4. They Peep Into Your Technology:
They usually show key interest in understanding the technology, techniques, and tools you apply to your product. Because a technology can foster as well as hamper growth. They show more concern in this because they have to bear the fortune as well as the misfortune. Therefore, technology contributes a key presence in decision making.

5. Competition: The Biggest Challenge
To beat the competition in the market, you got to be unique and different in your own way. Competition and competitors are the biggest challenge. Investors take a keen interest in knowing who are your competitors and what factor could affect the pocket. To welcome good investor, you need to be highly defensive and witful. Understand your market better and make an effort to sow something unique to ripe better results.

6. Exit Strategy:
The ultimatum and the most important element an investor looks into is the exit strategy. With this strategy, the investor shows interest in knowing how another buyer would value the different elements. And once when they arrive at the conclusion after viewing all the facts and figures they decide if they want to proceed or not. Else they just walk off or exit.

Therefore, these are some of the basic standard practices involved in the due diligence process. It helps an investor have a good idea to decide on matters concerning the investment relationship with the startup. Apart from this both the investor and the entrepreneur of the startup should communicate in clear terms. An entrepreneur should deal the whole issue boldly and the investor should implement fair due diligence process.

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