Five Ways Startups Can Impress Investors During Due Diligence

In 2023, with $3.5bn raised from 547 deals, African venture capital (VC) experienced a significant downturn. Year-on-year, total funding, and deal count declined by 46% and 28% respectively. This downturn marks a significant phase in the nascent and turbulent African VC journey.

From challenges such as the COVID-19 pandemic and the collapse of Silicon Valley Bank to opportunities like the 2021 VC bull run, these events have collectively influenced African VCs to adopt a more cautious investment approach, resulting in more detailed due diligence.

Due diligence represents a critical phase in the investment process, where investors examine various aspects of a startup to ascertain its investment readiness. Excelling in the execution of due diligence (considering that this is a two-way street) is pivotal for fast-growing, technology-enabled companies, as it determines whether the business can secure funding. The due diligence process can decisively make or break a startup’s funding prospects despite favorable macroeconomic conditions potentially easing the path to investment.  Doing it correctly means startups are well on their way to a crucial cash injection for the venture. But it’s easier said than done.

How can startups give themselves the best chance of completing due diligence? What are investors looking for? These guidelines are designed to help startups prepare for and navigate the due diligence process, thereby maximizing their chances of securing the necessary capital for expansion.

First impressions matter 

Generally speaking, there are three stages in the due diligence process: screening, business check, and legal business check. During the screening stage, investors will take a peek at your business before deciding whether they want to delve deeper.

If you want to get past this initial stage, you have to ensure that you’re making the best possible first impression. That means putting care and consideration into your pitch deck and initial documents but it also means ensuring that you’re making the best possible impression with your digital real estate (including your website, search, and social media presence).

Get all those things right, and you’ll be in a much better position to progress to the business check, where you’ll be asked to highlight your strengths and address any potential concerns, and the legal business check, where investors make sure that everything you’ve said is aligned with your books.

Put your best foot forward

A popular aphorism in the startup investment space is “back the jockey, not the horse.” While the technical fundamentals of a startup—such as its product, market fit, and business model—are indispensable, the ability of the founding team to articulate a clear vision, demonstrate deep domain knowledge, and exhibit proven management skills is frequently a more reliable indicator of a venture’s potential for success.

These characteristics not only reassure investors of the team’s capability to lead the venture to success but significantly enhance the startup’s attractiveness as an investment opportunity.

Demonstrate market and product expertise 

But that is not the only kind of expertise investors look for. Beyond the intrinsic qualities of the founding team, investors evaluate the team’s understanding of the market dynamics relevant to the startup. Demonstrating a deep grasp of the market environment—through analysis of demand, identification of unmet needs, and articulating a targeted strategy that distinguishes the business in the marketplace—is crucial. This approach to market analysis not only underscores the startup’s potential to capture and grow its market share but also significantly boosts confidence in the venture’s viability. Founders must also leverage precise metrics to illustrate the product’s value proposition and fit within the market landscape. Ultimately it’s about effective communication of how the product addresses specific market gaps or customer pain points, supported by data-driven evidence of its appeal and utility.

Prepare your business, financial, technical, and legal documentation 

During the due diligence process, you’re going to be asked to demonstrate that your business model is solid, your finances are sound, the technology you use is robust, and that you’re on a good legal footing. The availability and readiness of documentation to support these aspects are crucial. Preparedness in this context not only involves having all necessary documentation organized and accessible but also being able to present it promptly when requested by potential investors. Timeliness and thoroughness in providing these documents significantly enhance your startup’s credibility. It demonstrates meticulous planning, operational efficiency, and a proactive approach to addressing investor inquiries.

Treat potential investors like prospective partners from the start 

A good investor is so much more than the money they put into your business. They can also provide irreplaceable guidance and insight that could be crucial to the success of your business. In essence, once that money lands in your business account, they become partners in the startup.

Acknowledging this partnership dynamic from the outset and fostering an environment of transparent communication and constructive feedback is crucial. Such an approach lays the foundation for a trust-based relationship, essential for any successful collaboration. By actively engaging investors in discussions, seeking their advice, and valuing their input, startups not only benefit from the wealth of knowledge these partners offer but also affirm their respect for the investor’s contribution beyond financial support.

An ongoing process 

Getting these steps right will undoubtedly make it easier for you to successfully get through the due diligence process. It’s important to remember, however, that due diligence isn’t a once-and-done exercise. It’ll happen at every investment stage, from seed to acquisition or listing. It’s critical, therefore, that you constantly review and refine your due diligence readiness. Get it right, and you stand a much better chance of getting funding in even the most challenging fundraising environments.

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By Philani Mzila, Investment Manager, Founders Factory Africa