What is Venture Due Diligence?

By Unnat B. — Chief Strategy & Product @ TABS

Introduction to Diligence…as-a-Service.

It is considered “best-practice” for investors to incorporate a due diligence process to evaluate a potential investment opportunity with an extensive list focusing on the internal structure of the firm, its persisting risk factors, and strategies to overcome them.

But, what exactly is Due Diligence?

Due diligence is a broadly used term, though in context to VC or PE, it is defined as an investigation conducted by an interested party to analyze a business with an aim to find the best potential investment opportunity for investors.

  • It is concerned with cost & benefits, structures, assets, and liabilities; focused more on quantitative values.
  • It is oriented towards a “traditional approach and focuses on number crunching and assigning values to different sectors.
  • It considers the financial position of an organization and the earnings before interest, taxes, depreciation, aging of receivables, payables, cash flow, and capital expenditures.
  • Financial/Accounting, Tax, and Operational Due Diligence are all examples of hard due diligence.
  • It is concerned with motivating employees and compensation packages created specifically to boost their motivation.
  • It has come into increasing focus as an integral component of successful personnel catering to a successful investment.
  • Considers the culture of an organization and the roles, capabilities, and attitudes of its people.
  • Culture and Human Resources Due Diligence are the main examples of a soft due diligence.

Benefits of a Due Diligence Process

Prior to making an investment, investors take the time to examine the existing internal processes of target business and identify any risks. Once found, strategies to combat these risks are made and an in-depth analysis of the process is presented before entering a contact with them.

TABS Helps Organize & Display Your Due Diligence

TABS has curated an 8+ Core based checklist of Entity Setup Diligence, IT and Cyber Security Diligence, Legal Diligence, General Operations Diligence, Asset Management Diligence, Governance, HR, and any other questions / documentation you need for a structurally sound investment decision.

  • Corporate bylaws and any amendments.
  • Record of Meeting Minutes (containing ownership and board meeting minutes).
  • List of subsidiaries and any other entities (i.e. partnerships and joint venture agreements).
  • Jurisdictions lists where the company is authorized to conduct business.
  • Business plan (executive summary, market analysis and plan, operational plan, and complete financials).
  • List of officers and directors.
  • Records surrounding issuances or grants of stock, options, and warrants.
  • Documentation of past and current shareholder agreements, rights, and other matters concerning ownership.
  • Copies of any voting agreements, trusts or proxies.
  • Copies of right of first offer or refusal and pre-emptive rights.
  • Transfer restriction agreements and registration agreements.
  • Market research including size, share, trends, drivers, demand, conditions, opportunities, threats, differentiators, and outlook.
  • Profiles of major competitors.
  • Customer analysis including customer segments, demographics, churn rate, satisfaction, customer acquisition cost, NPS score and lifetime value.
  • List of major suppliers.
  • Identification of any barriers to entry in the marketplace.
  • Copies of long-term sales contracts.
  • Agreements with distributors, value-added resellers, and dealers.
  • Any IT outsourcing agreements.
  • A list of interfaces that link systems together.
  • Information around security and controls framework.
  • Details surrounding any hack, breach, or any other cybersecurity incident.
  • Any settled or active litigation files against or initiated by the company.
  • Any consent decrees, injunctions, judgments, settlements, or other orders.
  • Copies of all contracts.
  • Any loan agreements, bank financing agreements, and lines of credit to which company is a party.
  • Licensing or franchise agreements.
  • Copy of all guarantees to which the company is a party.
  • Information as to any past or present governmental investigation.
  • Copies of all attorneys’ responses to audit inquiries and all attorneys’ letters to auditors.
  • Federal, state, local and foreign income tax returns for the last three years.
  • Documentation surrounding the capitalization of the company.
  • Three years of annual and quarterly audited financial statements, with the auditor’s reports.
  • Unaudited financial statements for comparison.
  • Future financial projections.
  • Budget plan.
  • Any auditor communication to management for the past five years.
  • Schedule of accounts receivable and accounts payable.
  • A description of depreciation and amortization methods and changes in accounting methods over the past five years.
  • Copy of the company’s general ledger.
  • Detailed description of the Change Management Process when a change to the operating model is needed.
  • Overview of the organizational/functional structure of the teams.
  • List of company’s primary and support activities.
  • Details around distribution model and channels.
  • Details on all sales and purchases of major capital equipment in the last three years.
  • Copies of all lease agreements for equipment.
  • Copies of real estate deeds, appraisals, mortgages, leases, surveys, title policies, use permits and any other relevant documentation.
  • Schedule of owned and leased fixed assets, including description, date acquired, value and location.
  • Employee handbook (should cover policies, benefits, procedures, and training).
  • All employee, non-disclosure, non-solicitation and non-compete agreements.
  • Copies of all stock options and stock purchase plans.
  • Resumes of key employees.
  • Assessment of the competencies, skill sets, and capabilities of employees
  • Recruiting and onboarding process.
  • Copies of payroll documents.
  • Copies of any labor or employment contracts.
  • Copies of any violations, complaints, or requests for information regarding environmental, workplace safety and health (from private parties or governmental authorities).
  • Historical sources of information (i.e. aerial photographs, fire insurance maps, chain of title documents, and land use records).
  • Federal and local government records.
  • Permits and records relating to environmental matters such as underground storage tanks, air quality, water use, solid/liquid wastes and hazardous waste storage or disposal.
  • Any records of environmental clean-up liens.
  • Listing of hazardous substances (i.e. asbestos, pesticides or petroleum products) and any intentional or accidental spills/releases of the material.
  • Details on workplace safety and health programs.

DaaS (Diligence-as-a-Service) platform providing a holistic & in-depth qualitative evaluation of an early-stage venture. Powered by FSLTD. www.tabsscore.com