Embarking on fundraising is an exciting time for any founder. It can also be a very stressful time securing funding as the founder and the company may for the first time find themselves being reviewed by outside parties. Like preparing to apply for a mortgage, there are a number of steps you can take to prepare before you begin fundraising. Investors will want to know more about the founder and company they are thinking of investing in.
The due diligence process can bring several benefits to a founder and company, from having their business case tested to getting insights from investors on the wider market. The due diligence process may now also be more thorough than previous years, given several high-profile growth companies in the US having failed or underperformed. How can founders prepare for this process? And do those growing digital health companies need to consider additional factors?
Get your house in order
Having a company’s records in order seems obvious, but it is often overlooked, and some companies may have approached some issue informally, relying on trust between the founders, or perhaps not putting agreements into writing. Ensuring the company’s share capital position is accurately recorded, Companies House is up to date, and the statutory books are in order are simple but high value "wins".
Make sure you and any co-founders are aligned on the business idea and what equity stakes for the founding and management team should look like. If these have not yet been actioned, now may be a good time to fix that. Likewise, ensuring all key contracts are properly filed and completed. Has IP been properly licensed? Are key employees’ employment agreements properly drafted and signed?
When an investor asks to see a document as part of their diligence, being able to quickly respond with the right document presents the appearance of a well-run company. Being able to quickly respond can also help when investors may be reviewing multiple companies as potential candidates for investment. Making the investor’s life easier should generate a lot of goodwill.
Special considerations for digital health
For startups in the digital health sector, there may be certain fundamental questions that are asked earlier on in the process. Will the company need to be registered or authorised by any regulator or other professional body? If so, what is the timeline for that process? Is any clinical or other healthcare expertise needed going forward? If so, does the company have appropriate individuals engaged or a plan to do so?
It is not that these items need to be resolved prior to approaching investors, but it may be that investors want to see a considered route map to achieve those milestones. It may also be that you need to start considering your IP protection strategy sooner than other companies.
There are a range of legal issues that a company may want to direct its resources towards. Identifying which of those is important at the earlier stages of a company is not always easy when budgets may be tight.
Founders should consider their own background
Investors are often keen to know more about the founder and why they are the right person to take the company and idea forward. Take time to consider why you are the best person to take this idea forward.
Enjoy the journey
Think of it as a means of getting expert, actionable advice on how to improve your company. Companies are likely to require further rounds of funding on their journey, so it is a good time to start learning the lessons to put you in good stead as the company grows.
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