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What are the most effective due diligence strategies for startups?

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Due diligence is a crucial process for startups that want to attract investors, partners, customers, and talent. It involves verifying the validity, viability, and value of a business idea, product, or service, as well as assessing the risks, opportunities, and challenges involved. However, due diligence can also be time-consuming, costly, and complex, especially for early-stage startups that may lack the resources, expertise, or data to conduct it effectively. In this article, you will learn some of the most effective due diligence strategies for startups that can help you save time, money, and effort, while also increasing your chances of success.

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1 Define your goals

Before you start any due diligence process, you need to have a clear idea of what you want to achieve and why. Depending on your stage, sector, and situation, your goals may vary from validating your market fit, to securing funding, to scaling your growth, to exiting your business. Your goals will also determine the scope, depth, and duration of your due diligence, as well as the stakeholders involved and the criteria used to evaluate your performance. Therefore, you should define your goals as SMART (specific, measurable, achievable, relevant, and time-bound) as possible, and communicate them clearly to your team and your potential partners.

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2 Gather relevant data

Data is the foundation of any due diligence process, as it provides the evidence and insights to support your claims and decisions. However, not all data is equally useful or reliable, so you need to be selective and strategic about what data you collect, analyze, and present. You should focus on the data that is relevant to your goals, your industry, and your audience, and that can demonstrate your value proposition, your competitive advantage, your traction, and your potential. You should also use a variety of sources and methods to gather data, such as surveys, interviews, experiments, benchmarks, reports, and analytics tools, and ensure that your data is accurate, consistent, and up-to-date.

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3 Organize your documents

One of the main challenges of due diligence is managing the large amount of documents that you need to prepare, share, and review. These documents may include your business plan, your financial statements, your legal contracts, your intellectual property rights, your customer testimonials, your product specifications, and your market research. To make this process easier and more efficient, you should organize your documents in a logical and accessible way, using folders, labels, categories, and formats that are easy to understand and navigate. You should also use a secure and reliable platform to store and share your documents, such as a cloud service, a data room, or a collaboration tool.

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Omoruyi Edoigiawerie

Lead Partner @ Edoigiawerie & Company LP | Startup Attorney, LLM
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This is pivotal in showcasing readiness and transparency to potential investors or partners. Begin by compiling essential corporate documents such as incorporation documents, IP registration certificates, shareholder agreements, and any regulatory filings. Also include financial records, tax and accounting statements that show the startup's financial health and trajectory. Also have key documents highlighting partnerships, licensing agreements etc. Additionally, provide an overview of customer contracts, user agreements, and litigation portfolio (if any). Ensure that all documents are properly organized and readily accessible (also have them in hard and soft copies), it will help in streamlining the due diligence procedure.

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4 Solicit feedback

Due diligence is not a one-way street, but a two-way dialogue between you and your potential partners. Therefore, you should not only provide information, but also seek feedback from them. Feedback can help you identify your strengths and weaknesses, improve your product or service, address any concerns or questions, and build trust and rapport. You should solicit feedback regularly and proactively throughout the due diligence process, using various channels and formats, such as calls, emails, meetings, surveys, or demos. You should also be open and responsive to feedback, acknowledging it, thanking it, and acting on it.

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5 Adapt and iterate

Due diligence is not a static or linear process, but a dynamic and iterative one. As you collect more data, receive more feedback, and encounter more changes, you may need to adjust your goals, your strategies, your assumptions, or your actions. Therefore, you should be flexible and agile, ready to adapt and iterate as needed. You should monitor your progress, measure your results, and evaluate your performance against your goals and your expectations. You should also learn from your failures, celebrate your successes, and share your insights and lessons with your team and your partners.

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Omoruyi Edoigiawerie

Lead Partner @ Edoigiawerie & Company LP | Startup Attorney, LLM
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For a Startup, this involves fostering a culture of flexibility, continuous learning, and responsiveness to change and market expectations. Stay attuned to market trends, customer feedback, and industry shifts. Develop a mindset that welcomes change and encourages "thoughtful" experimentation. Also utilize workable methodologies to iterate on products or services swiftly, incorporating user feedback and data-driven insights. Have an environment that encourages open communication and collaboration within the team, allowing for diverse perspectives.

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6 Follow up and follow through

Due diligence is not a one-off or isolated process, but a continuous and integrated one. Even after you complete a due diligence process, you should not stop there, but follow up and follow through with your potential partners. You should maintain regular communication, update them on your status, and confirm your next steps. You should also deliver on your promises, honor your commitments, and meet your deadlines. By following up and following through, you can show your professionalism, credibility, and reliability, and increase your chances of closing the deal, building the relationship, or achieving the outcome you want.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Marc Morgenstern (he/him)

The Mentor-at-Large for The House Funds; Author, "The Soul of the Deal". (The EQ of M&A). Managing Partner, Blue Mesa Partners
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Trust is the building block for any investment. Investors hate being surprised. Make sure unpleasant information is accessible. Present bad facts to minimize negative consequences. Said differently, instead of having an investor discover a major risk, affirmatively reveal and frame it. “Here’s how we analyze and mitigate the risk so it’s not a showstopper.” An investor should credit you for transparency and intelligence. You were aware of the risk, knew it would be of concern, and have minimized its potential harm. Alternative? Let investors uncover a risk, wonder if you didn’t know about it, and assume it’s unsolvable. Breeds mistrust and suspicion. Think that’s a better approach? To be clear, that’s a rhetorical question.

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What are the most effective due diligence strategies for startups?

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1 Define your goals

2 Gather relevant data

3 Organize your documents

4 Solicit feedback

5 Adapt and iterate

6 Follow up and follow through

7 Here’s what else to consider

Startup Development

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What are the most effective due diligence strategies for startups?

1

2

3

4

5

6

7

1 Define your goals

2 Gather relevant data

3 Organize your documents

4 Solicit feedback

5 Adapt and iterate

6 Follow up and follow through

7 Here’s what else to consider

Startup Development

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