Due Dilligence

Exploration Essay

Investing in new start-ups is a very risky, yet highly rewarding process that most
big investors avoid doing. However, over a series of research and analyses of the
company, many risk factors can be crossed out or considered on whether it would be a
good investment or not. This process is called due diligence. Due diligence consists of
three stages: Screening due diligence, Business due diligence, and Legal due diligence.
By the end of these three steps, the investor should have a clear idea of whether or not
they should finalize their investment choice or choose a different stock.

Venture funds typically review hundreds of investment opportunities over the
years in order to see if it's a profitable decision or not. During this stage, also known as the due diligence screening process, the fund uses predetermined criteria in order to decide if the company is a good fit for them to invest in or not. Usually for every 100 opportunities reviewed, only 10 pass this stage. This allows them to quickly cross out the ones that aren't a suitable choice and choose companies that they will spend more time and money evaluating. The two main reasons why some investment opportunities don't pass the screening test are if they didn’t meet the criteria (for example, the business stage, geographic region, size of the deal, industry sector), or if the idea didn’t come from a trusted source as some venture funds only accept opportunities that come from trusted referrals.

During the next stage, all the passed firms will go through something called
Business due diligence. In this process, the members of the team that the stock was
assigned to will investigate further by determining the viability of the deal. While each venture fund might have a different research process, most of them consist of reviewing the management team, market potential, the product or service and the need it meets, and the business model. If the firm meets the criteria set for this process, it is then passed on to the next stage.

This is the last stage for a venture firm to finalize its decision on the deal and sign a contract. This stage is also known as Legal due diligence. Once the venture fund has reached the stage of moving toward a favorable decision, its lawyer will complete a legal review. This could include going through their tax returns, revenues, or business plans. The firm has to be ready to answer any question asked by the lawyer as clearly as possible and be transparent with the company. The lawyer will also have to answer any questions asked to him about the investment deal.

While there is no 100% success rate when it comes to investing, there are many
techniques and strategies that can be used to minimize any risks and maximize profits. One of these techniques includes the due diligence process. It is used by investment firms all over the world and through these rigorous reviews and research, it sets a clear understanding of if it will be a good investment opportunity or not