How to Prepare For and Survive Investor Due Diligence
Preparing For & Surviving Due Diligence | Ep 14
Fund managers, sponsors and founders who are raising capital and want to be ready when a serious investor starts due diligence.
5 key takeaways
- Answer questions fast and fully. Richard says deals slow down when people take weeks to reply or never reply. Investors want responses that are quick, precise and cover every question asked.
- Stay calm under tough questions. Teams should expect hard questions and avoid getting emotional or defensive. Slow or poor communication can lead an investor to move on.
- Offer a background check and references. Richard suggests an investigative background check on partners and the team, plus seven documented reference checks for each main partner or the top CEO. Many raisers talk to a securities attorney about how a check can be shared.
- Build a secure data room. A data room is a secure area holding the files an investor would review. Examples include resumes, track record, financials, pro forma models, tax returns, balance sheets and income statements.
- Prepare one level above today. A raiser taking checks of one size should prepare for the next investor tier. Richard says doing so can help with current investors and prepares the team if a larger investor appears unexpectedly.
What this talk covers
Slow replies are one of the quickest ways to lose a sophisticated investor, according to Richard C. Wilson. He says teams that wait weeks to answer diligence questions, or never answer, signal they may not be serious about raising capital. He also shares a billionaire client's view that poor email habits suggest someone is not a good business partner. Communication itself is treated as a form of due diligence.
Richard recommends having a background check, seven reference checks per main partner, and a data room ready before investors ask. He describes informal tests, such as a happy hour or a burnt hamburger at lunch, that show how a person reacts under pressure. His advice is to prepare for the next investor tier up and to do what investors want but few capital raisers actually do.
Facts and figures
- Richard suggests documenting seven reference checks for each main partner or the top CEO.
- One example in the talk is a 30 question due diligence questionnaire, where an investor ran out of questions after 12 and found 18 more answered in the PDF.
- Richard says a raiser taking $100,000 checks should prepare for family offices, and family offices should prepare for institutions.
Sources
From Richard C. Wilson's Centimillionaire Strategies YouTube channel: Preparing For & Surviving Due Diligence | Ep 14. Quotes come from the video captions, lightly edited for readability. Figures are the speakers' own estimates and experience.
General education only. Not legal, tax or investment advice.
Talk to a securities attorney to explore options around background check sharing, data room contents and investor disclosure practices. Do not use AI to write your own legal agreements.
Said on the call
"If you are ready for investor due diligence, then more often, a higher percentage of the time, you're going to get approved and get a capital allocation."
"If you're not ready, you'll get caught flat-footed. If you're really ready, you will convert investors faster."
"A secure area where you have all the files that someone doing intensive due diligence, to maybe invest with you, would want to review."
- 1Order a background check
- 2Document seven references per partner
- 3Build a secure data room
- 4Prepare a due diligence questionnaire
- 5Answer investor questions quickly
Related questions
- How do I close a funding round?I close a funding round by focusing on investors who fit the opportunity and moving each interested prospect through clear, consistent follow-up.
- What documents do investors request during due diligence?Prepare a clear, organized package covering your operations, investments, compensation, team, and track record.
- How do I raise capital for my business?I raise capital by building a repeatable system for attracting the right investors, establishing credibility, and developing relationships before asking for money.
Questions about this video
What is a data room?
Richard describes it as a secure area holding all the files an investor doing intensive due diligence would want to review. This can include resumes, track record, financials, pro forma models, tax returns, balance sheets and income statements.
What is a liquidity test?
It is an informal test some investors use to learn about a person. They may take the raiser out for happy hour and see whether they bring up lawsuits, a divorce or a dispute with a former partner. Richard says many people pass the formal office diligence and then fail this part.
How many reference checks does Richard suggest?
He suggests documenting seven reference checks for each main partner or the number one CEO. They should be kept on file alongside a background check so investors do not need to order their own.
Put this into practice with the data room checklist. See all due diligence resources.
