If there’s one thing an entrepreneur needs to understand about the due diligence process, it’s this: Investors invest in people, not in business plans. They must assume things won’t go exactly according to plan and bet on the people to create an opportunity for plan B.
The due diligence process is an investor’s opportunity to get up close and personal with an entrepreneur to assess whether the individual has the skill, tenacity and character to create and lead a company.
Due diligence is also a time for investors to make absolutely certain there is nothing in the entrepreneur’s history that would cause them to choose not to invest.
That’s why angel investors often go through rigorous founder and senior management team screening before they write checks. Entrepreneurs shouldn’t be put off by this normal and accepted aspect of due diligence.
When you think about it, there is good reason for a degree of caution. Angels invest not only money; they also invest passion, time, expertise and their reputations in terms of referrals, to help a portfolio company succeed. They want to be sure their confidence is well-placed.
So what can an entrepreneur expect?
Potential investors will contact references — friends, professional associates, advisors, service providers and business partners. Consider carefully the names you supply.
The due diligence process will also likely encompass employment and education verification; criminal and civil searches; bankruptcy and credit checks, as well as other background searches.
If there is anything in your background that might raise a flag, it’s better to bring it up yourself. Have a discussion with potential investors before the process starts to gain agreement that if an issue arises, you will be given an opportunity to discuss it.
It only takes the slightest bit of discomfort about the character or ethics of the founder, management team or company culture to drive an investor away.
On the other hand, a forthright discussion between a well-intended entrepreneur and investor — even about a difficult subject — can add to the trust between the two.