Why Entrepreneurs Should Not Dread Due Diligence

One of the terms which inspire terror in most entrepreneurs’ hearts is “due diligence.” This is the time when investors will poke and probe and prod. They will open your kimono and look into your company’s bowels. They will scrutinise your book of accounts, quiz your customers, and grill your suppliers in order to find out whether you’re worth investing in. This can be quite scary, because you’re always worried about whether they will uncover the skeletons in your cupboard (and we all have skeletons we have done our best to hide).

You are not sure whether you’ll be able to pass their tests, and this can create a lot of anxiety. Part of this is because most entrepreneurs have been so focussed on running the company and making sure that operations are running smoothly so that they can acquire paying customers that they often don’t bother about niceties such as accounting or governance.

This is the one thing which investors are focussed on because they need to make sure that everything is shipshape before they will put in money into the company.

Due Diligence Matters

Due diligence is a bit like exam time, and entrepreneurs don’t look forward to it, but they need to change their perspective. If they really want to grow, they should actually look upon it as an important test from which they can learn a lot. It will help them to plan for the future, because if you want to remain more than just a small startup, and if you feel that you’re mature enough to be able to absorb the investors’ money, you need to be able to show that you’re capable of meeting the high governance standards which investor demand in order to protect their money.

If due diligence is performed well by an investor, then irrespective of whether he finally decides to give you money or not, the process can provide you with very valuable insights into your company. This is usually stuff you know which needs to be fixed, but which you have never got around to doing, because you have been too busy fighting hundreds of other fires in order to remain afloat.

The truth is that none of us wants to accept our failings, and we’d rather bury them under the carpet, but the due diligence exercise will not allow you to shy away from your lacunae and you will be forced to fix these.

This is a great chance to get your act together, both internally as well as externally. If you had to pay a consultant to do this, they would charge you an arm and a leg, and your investors are doing this for free, which means it’s a great bargain!

You will also get valuable insights into the investors’ worldview, which will stand you in good stead – not just for this round of funding, but for the future as well. You will learn what investors are looking for, and you will also find out whether you’re capable of providing this.

On the other hand, you may realise that this is just not your cup of tea, and you’re quite happy continuing growing slowly as a lifestyle business. After all, taking on the responsibility of accepting money from outsiders, means that you become answerable to them, and this will be an ongoing burden you may not want to bear.

[This post by Dr. Aniruddha Malpani first appeared on LinkedIn and has been reproduced with permission.]

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