How and why VibraniumVC conducts due diligence

What due diligence is

Due diligence is a form of comprehensive assessment that an investor conducts before investing in a business.

Typically, funds first sign a term sheet, which details the main points of the transaction. And then, they conduct due diligence to ensure everything is in order with the company.

VibraniumVC has its own approach to this process. We conduct due diligence prior to making an investment decision, so that we can build a clearer picture of the startup, flag up any potential risks in advance, and discuss how to fix everything with the founders before negotiating the terms of the deal.

When we conduct due diligence

A startup enters due diligence after the following four stages:

• The scout evaluates whether a startup is aligned with our focus: the US market, 2x valuation growth, $20 MRR revenue, and a b2b SaaS product.
• The analyst conducts scoring based on the team, market, technology, business model, and possible deal terms.
• The investment manager looks at the business model and technology and requests a description of the go-to-market strategy.
• The GP conducts an evaluation of the team, product, and sales. Once this stage is complete, the startup moves on to due diligence.

How due diligence works

DD comprises three parts: financial, legal, and technical—and there’s also KYC to consider.

• Financial is conducted by a fund analyst. They send the startup team a form with questions along with a request for documents. We sign an NDA, and the startup submits all the required documents.
• The legal is carried out by the COO, who also requests documents for analysis.
• The technical analysis is carried out by an investment manager. At this stage, they look at how the product is written.
• We conduct KYC for investors and founders to avoid any risk of sanctions.?

What due diligence can reveal

Based on the results of the checks, we assign three levels of risks: red, yellow, and green.

?? puts a stop on moving to the next stage. This means you can only continue to discuss the deal after resolving the issue.

?? means an issue which we can help resolve within 3 months of the round taking place. This is pre-agreed in the obligations.

?? means there is a minor issue or a plus point. There will be six months to review following the transaction.

Is it possible to avoid verification?

No, we do due diligence all the time. We’re ready to discuss investments if you have completed all the stages and received approval. Even if a prominent fund enters in the same round, we still conduct our check as, otherwise, the risk of losing money often increases.

For a startup, early due diligence is reasonable. It's like a comprehensive MRI for a startup—only for free. During due diligence, we explain what needs to be done to be more attractive to investors and avoid any problems with later-stage investments.

What problems can due diligence reveal?

Variety. For example, problems with the rights to IP. If this is not flagged before the transaction, the fund may wind up investing in a shell legal entity which does not hold the rights to its product.

Another common problem is the clearance of previous investments. If the founder has issued their assets in a startup as a loan, then, after the next round, they can take the money back and the company will go bankrupt. Even if they don’t have this intention, it's a potential problem for the investor.