What is Early and Seed-Stage Due Diligence?

This article highlights ways you can perform due diligence as an investor. It discusses how you can do this with a company with an extensive financial history or how you can do this with a startup company.

When it comes to an individual investor’s due diligence, Angel and Venture Capital investors should know that certain factors matter more than others, depending on how extensive a company’s history is.

What’s more, when a company is new and just starting to make a name for itself, there will likely be insufficient financial history to observe, emphasizing investigating the people involved in the company. Are they the right leaders?

This lack of company history means that any due diligence focus should shift towards a background investigation of the people behind the company.

You will need to determine if these people are strong leaders that will take the startup to the next level. You have to include other essential aspects in the investigation, such as their social media presence, criminal records, educational background, and more.

Do a Due Diligence

Before assessing what you should look for as an early and seed-stage company investor, let’s start by defining due diligence. Investopedia states that due diligence is a “common practice” consisting of investigations, audits, and reviews “performed to confirm the facts of a matter under consideration.”

Investors usually investigate companies with longevity and extensive history by examining their financial records “before entering into a proposed transaction with another party,” thus, performing due diligence with early-stage companies can be more difficult.

One of the most important conclusions you need to make when conducting due diligence is whether or not the person you’re investing in aligns with your goals and can help you achieve them.

Investopedia outlines that an important step when conducting due diligence with any company is assessing potential risks, which is even more important when investing in a startup.

Legal Matters

When evaluating a startup company, you should discern whether or not there could be future legal repercussions for their actions while also looking out for current “legal or regulatory matters.”

Furthermore, you should be able to conclude whether or not you believe in the startup company and its product. You should be able to make a reasonable hypothesis about the company’s potential performance. You can do this with a criminal background check on the most important parties involved in the company.

Evaluation Through Social Media

If you like, you can check out their social media presence and deduce if their views align with yours, as well as the current societal climate.

Essentially, you can use your judgment of character and “worst-case scenario” assessment skills.

Additionally, your due diligence should incorporate confirmation of one’s educational background, such as the CEO or another vital member of a new company. You will be able to have an idea if the CEO is the right leader you will be trusting on.

Completing a degree in a related field isn’t always necessary to build a thriving company; however, if one claims to have a degree from an accredited institution, it may be a good idea to confirm if this is true. Old-fashioned honesty can count for a lot when putting your money into a startup company.

Risk Assessment

Risk assessment and background checks matter when you’re an individual investor performing early and seed-stage due diligence.

You can gain perspective on risk assessment by analyzing how a company makes its decisions, who is involved, their presence, and whether or not you believe in its product. You can perform background checks by confirming their educational background and looking for information suggesting a criminal or dishonest background.