Anyone who has watched Shark Tank, Dragon’s Den or any other show where millionaire investors put entrepreneurs through their paces will be familiar with the concept of due diligence. The principle is that no rational person would pay for something they don’t understand. A thorough approach to fundraising is crucial.
Due diligence in fundraising is a procedure that requires gathering data and documents. It is crucial that founders present documents to support claims made during the pitch. They must also provide the operation details and also disclose any potential risks to investing. Being aware of what is expected of gathering information can speed up the fundraising process and ensure that all the necessary documents are readily available.
While the scope of fundraising due diligence is pretty well defined the specifics vary according to a company’s stage of development and the size of the investment round. Due diligence requirements are minimal at the seed and angel stage but they grow more strict as a business moves towards series A.
A good idea is to develop a risk matrix and a system that determines the types of people who require further investigation. For example, nonprofits should review their gift acceptance policies and devise a method for screening out donors with known criminal histories or known scandals. They could also set up donor tracking software to flag any mentions in the media of their largest donors, in the event of notable events.