Question: Can you describe the due diligence process from the VC’s perspective and how long this generally takes? Do you have any advice for entrepreneurs to keep in mind as they build a company that would help accelerate the process?
The diligence process is a varied one with respect to timing, but pretty standard with respect to tasks. Every VC is different in how they go about their process, but in general includes business, financial and legal review.
Specifically for us, we take a team approach to due diligence, as opposed to the sponsoring partner doing most of the work. Once one of us believes that a company is interesting, others will be brought into the process early-on to assess the company. Depending upon the business model, depth of intellectual property and other factors, we will determine for each company the proper diligence team. In general, our potential investments see most, if all not all of our investment team during the process. Despite, this we try to be as efficient as possible with the company’s time and usually find that we can move as fast as the company can.
As for advice, follow the Boy Scouts’ creed: “Be Prepared.” Have your corporate documents, your financial projections and your major contracts well organized. Make sure that you intellectual property is protected, or you have a plan to get their post-financing. Also, make sure that you all of your employee documentation is complete and up-to-date. Any delay or sloppiness here will reverberate through the process and extend the amount of time needed to complete the diligence review. This highlights the reason to keep your counsel well-informed of your business activities, as they can help ensure all of your documentation is complete.
Remember, there are generally three components that affect the speed of diligence: the preparedness of the company and the amounts of time that the VCs and their lawyers have to review it. So if you are slow in getting items to either the VCs or their lawyers, it will definitely slow down the process.
One other piece of advice: if you have any sensitive issues, bring these up early in the process – don’t wait until the end. One, these are the issues that take time to get comfortable with and secondly, if you wait until the end, it’s only natural to wonder if you were trying to hide the situation from anyone.