Chapter 9: The Fundraising process: Negotiating - Due diligence and final decision-making

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Before, after or in parallel with negotiating a term sheet, an investor will perform due diligence on your company. In this blog post we will discuss the different aspects of the due diligence process, and how the final decision to invest in your company will be made. 

What is due diligence? 

Due diligence (DD) is a process during which a potential investor has access to (usually) confidential information about your company. During this phase, they will review, verify and investigate all that information to confirm their views on the company.

Investors may involve external parties such as financial consultants, lawyers, tax experts, technical experts, etc., to help them with the process. Because VC investors do not invest their own money, it is important for them to deeply investigate your company to ensure there are no underlying issues, or at least to prepare for potential risks.

Types of due diligence

There are different types of due diligence processes, depending on the nature and stage of your startup. We have provided below a few examples of the most common due diligence processes. 

Financial due diligence

This is a review of a company's financial records and accounting practices to evaluate its financial health, revenue, expenses, profits, cash flow, and other financial metrics.

Example documents
  • Business plan / financial model 
  • Financial statements 
  • Tax returns, etc.

Legal due diligence

This is a review of a company's legal documents, contracts, agreements, and other legal obligations to identify potential legal risks, liabilities, and disputes.

Example documents
  • Incorporation certificates
  • Company bylaws
  • Contracts and agreements
  • Intellectual property
  • Litigation and disputes, etc.

Commercial due diligence

This is a review of a company's market position, customer base, competition, and other factors that may affect its future growth and profitability.

Example documents
  • Market analysis reports 
  • Competitor analysis reports
  • Distribution channels
  • Partnership agreements, etc.

Operational due diligence

This is a review of a company's operational processes, systems, and procedures to identify potential inefficiencies, risks, and opportunities for improvement.

Example documents
  • Health and safety policies 
  • IT systems reports
  • Performance management reports, etc.

Environmental due diligence

This is a review of a company's environmental impact, compliance with environmental regulations, and potential environmental liabilities.

Example documents
  • Environmental permits
  • Water conservation reports 
  • Waste reduction reports  
  • Climate impact reports, etc.

Human resources due diligence

This is a review of a company's management team, organisational structure, and employee policies and practices to evaluate its human capital and potential risks.

Example documents
  • Management resumes 
  • Employee benefits and compensations,
  • Personnel files and records, etc.

Technical due diligence

This is a review of a company's technology assets, including hardware, software, and intellectual property, to evaluate its technical capabilities and potential risks.

Example documents
  • Data protection policies 
  • List of software used 
  • Software licences, etc.

What can you do to ensure you have a smooth due diligence process?

Securing favourable terms in your term sheet involves a blend of tactical preparation and astute negotiation. Here are some ways you can enhance your negotiating position:

  1. Organise and update all documents: All relevant documents, including financial records, legal documents, business plans, and employee records, should be up-to-date and organised. Having an accessible, well-structured data room can make the process significantly smoother.

  2. Understand your business thoroughly: Be ready to explain every aspect of your business, including your value proposition, business model, competitive landscape, revenue streams, and growth strategy. You should also understand your finances inside and out. For every assumption you make concerning your business, make sure you back them up with credible references. 

  3. Engage experts when needed: Whether it's a financial advisor, legal counsel, or industry expert, don't hesitate to bring in professionals to help you prepare for due diligence. They can help you understand what investors are looking for, identify potential issues, and develop responses to likely questions.

  4. Be transparent: It's crucial to be honest about your business's strengths and weaknesses. Trying to hide issues will only damage trust when they are eventually discovered. Be upfront about any potential challenges or risks, along with your strategies to address them.

  5. Prepare for deep-dive questions: Investors will ask detailed questions about all aspects of your business. Be ready to provide clear, concise answers to these questions.  It can be valuable to prepare a frequently asked questions (FAQ) document, which provides investors with the questions and answers they need. Also, don't be afraid to say "I don't know", but follow up with, "I'll find out". 

How long does the due diligence process take?

The DD process can take anywhere from a few weeks to months, however while it is ongoing, investors and their advisors will continuously ask detailed questions and frequently request a variety of documents. Some investors ask for exclusivity, which prohibits the startup from undergoing DD by other investors for a certain period of time. Even though this puts a hold on conversations with other (non-complementary) investors, it also means that you can put a time limit on the exclusivity period and thus speed up the process of DD.

It is important to note that due diligence is not just about verifying facts but also about building relationships and trust with potential investors. By being well-prepared, transparent, and professional, you can help ensure the process goes smoothly and potentially improve your chances of securing investment.

Understanding what the final investment decision process looks like

Each VC has its own decision process, but the common denominator across all investors is the existence of an investment committee (IC). The investment committee is the central decision unit in the entire process, where the decision to investigate, fund or end a deal is taken. This process is internal to the VC fund, and it is made up of the firm's most senior partners or advisors. Once the IC of the VC fund has decided to invest in your company, the end of the negotiation phase is marked by the signing of the term sheet. 

Below we suggest four things you can do to help the investment committee decide in your favour. 

  1. Understand the investor’s process: Every investor is different, therefore make sure you ask the investors you are talking to about what their process usually looks like. Mark important dates in your calendar (next IC pe.) so you can check beforehand and afterwards to see if you can help them with any additional information.

  2. Build on your relationships: Throughout the fundraising process, build strong relationships not just with your primary contact at the VC firm, but with other partners as well. Attending industry events, requesting introductions, and scheduling one-on-one meetings can help you widen your network within the firm. The more advocates you have within the firm, the more likely it is that the investment committee will decide in your favour.

  3. Proactively communicate progress: Don't wait for the investment committee to ask for updates. Proactively communicate your startup's progress, especially when it comes to key milestones or achievements that align with the VC's investment criteria. This demonstrates momentum and can make your startup a more compelling investment opportunity.

  4. Ask for feedback: Following any interaction or presentation with the VC, ask for feedback. This will provide valuable insights into their thoughts and potential concerns. Addressing these proactively can improve your chances of a positive final decision.

PwC Pro Tip
  • Having a well-structured data room can be the differentiating factor in determining the smoothness of the DD process. It is important to take time to prepare a virtual data room during the preparation phase of the fundraising to speed up the process. Update this data room periodically (e.g. every three months) to prepare for future rounds.
  • Here is an example of how you can structure your data room. Of course, what you include in your data room depends on the stage of your company.
  • It is important to note that you should make your data room available to your investors only after they have signed a confidentiality agreement.

In the next blog post, we will be discussing the closing phase of the fundraising process and what comes next.

For more information on how PwC can support you in your fundraising, and how we support startups and scaleups visit our website

Download the full PwC's fundraising whitepepaper here

Negotiation phase

Term sheets

Closing phase

What comes next

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Pascal Janssens

International Tax Partner, Platforms and Market Positioning Lead, PwC Belgium

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Enya Steenssens

Scale Lead, Senior Manager, PwC Belgium

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