Investment Team Insights – Streamline VC Due Diligence

Three Steps for Startups to Streamline VC Due Diligence

By: Sara Omohundro, Principal

Preparing documents for due diligence during a fundraise can be daunting. VCs often send companies long lists of requests that can feel overwhelming and time consuming. However, when a company is well organized and prepared, the due diligence process can be navigated much more easily and quickly. It will also leave a good impression on the VC! 

Follow these three steps to painlessly provide investors with the information they need to make an investment decision.

Step 1: Organize the Data Room

Start with an organized data room, and the rest will fall into place. There are many data room platforms out there, both free and paid. Which you choose is personal preference and not of great importance. What is important is that the data room is well organized. 

Begin with a typical due diligence checklist. You can find several examples of VC due diligence checklists online, or you can reference the Elevate Ventures checklist here

Organize your data room by creating folders and sub-folders that align with the order of the checklist. For example, using the Elevate Ventures checklist, you would have folder A: Team, and within that folder you would have sub-folders such as A1: Resumes for all key management personnel. This makes it easy for VCs to find information inside your data room and for you to go back and update information later. 

If something on the checklist doesn’t apply to your company, don’t keep them guessing; note why it doesn’t apply. Keep in mind that your data room organization doesn’t have to exactly match a specific VC’s checklist. It just needs to be organized in such a way that investors can easily find what they need.

Step 2: Upload Documents

Once you have the folders and sub-folders in place, fill them in. Use your most recent, up-to-date information. Include financials going back at least three years (or until the company’s inception if it is less than three years old). 

Be as detailed and thorough as possible. It will be easier for you to provide more information up front than to regularly go back to the data room to upload more information as additional requests come in. If you do receive follow-up questions, update that information in the data room. VCs often ask similar questions, so if one VC requested additional information, others will probably ask for that same information, too.

Step 3: Keep it Updated

Update your data room at least once a quarter. Be sure to regularly update time-based items such as financial statements and financial model projections. Periodically check other items to see if anything has materially changed, and update them as needed. For example, if you hired new team members, make it a habit to update your organizational chart. If you update your pitch deck, save the new version in the data room, too. If your data room is updated, kicking off due diligence with a new investor will be super easy — all you’ll have to do is send a link!

Other Tips

Following these steps will significantly streamline the due diligence process, but there are a few other things to keep in mind, too. 

  • Investors are sometimes willing to share due diligence findings with other investors. If an investor has completed due diligence, ask them if they would be willing to share their diligence report with other investors. Not only will this take some of the diligence burden off of you and other investors, but it will also prevent your references from being contacted by several investors and experiencing “reference fatigue.” This is especially important when your references are your customers!
  • Finally, remember that every investor is different. Each VC will have a slightly different list of requests and questions. Some VCs will want to conduct extensive due diligence; others will not. The extent of diligence will depend on several factors, such as the investment size under consideration, whether the investor is leading the deal, and if the company is already in the investor’s portfolio. 

Regardless of what an investor asks of you, following these steps and tips should help make for a much easier, faster due diligence process.