During our work with StartUps as an investor and consultant, we regularly face the question when and under which circumstances a young company is ready for the next/first funding round. In most cases, the upcoming need and timeframe for capital to fund and accelerate growth represents only the starting point for the team to answer the question. Usually, the follow-up questions revolve around the topic of valuation and giving out new company shares in order to cover the emerging liquidity gap until reaching the break-even point or the next funding round.
In this context, we often perceive (especially with teams in early stage StartUps) the founders not taking an external perspective on their own company and critically questioning, whether they fulfill the necessary conditions to board on new investors or close the funding round at the targeted valuation. As a team, you should therefore not only answer the question about the need for capital. But at the same time audit your own company to see, if it meets the requirements to raise capital from investors at the desired conditions and valuation. The audit of one’s own company in this context is what we understand as a check for investor readiness.
The willingness of investors to invest in StartUps highly depends on the current situation of the financial and capital markets. StartUps compete for the capital of potential investors not only with other StartUps, but also with a variety of investment forms and assets. Due Diligences for a StartUp funding round can become much more extensive in this context and capital commitments to young companies more selective.
We therefore recommend young companies, which have identified a liquidity gap and demand for fresh funding of their company in the near future, to intensively deal with their own company from an investor’s point of view and subject it to an investor readiness check as a first step for any upcoming funding round (see also our article on the subject of preparing for a due diligence) . If done by an unbiased third party, it is called a vendor due diligence. The aim of a vendor due diligence is to prepare the company for the upcoming funding in the best possible way, to compile essential documents in various areas of a potential audit and to sort out processes to the company’s operating business. The intention is to avoid reductions regarding valuation or even rejections by potential investors.
At this point, we would like to point out our consulting offer to support preparing a due diligence in the run-up to a financing round for StartUps. In this context, we recommend that every StartUp, especially teams without solid experience, perform a self-check for investor readiness in the form of our mini-vendor DD (DD by an independent third party). Together, we identify the most important audit components, critical points from the company history or in the financial case and provide valuable feedback on optimization approaches of your catalog materials such as pitch deck or financial plan. The check supports you in a delay-free auditing process and identifies bugs before they lead to severe reductions in the company valuation by potential investors or unfavorable investment conditions. Check out our Consulting Page for further details.
Within the Investor Readiness Check, the following areas should be reviewed:
- Proof of Business
- Scaling potential and growth rates
- Competence profiles (e.g. existing core competencies, consultant setup, processes, etc.)
- Catalog assets and documentation (e.g. founder story, pitch deck, finance model, company valuation, equity story, further analyses on market and competition, etc.)
- Company history and legal setup
- Overview of essential contracts and legal-risk assessment
We offer a Mini Vendor DD for startups as part of our consulting services. Together with the founders, we screen the most important audit areas depending on the individual StartUp situation and prepare a StartUp for an upcoming funding round in the best way possible.