Hi and welcome back. I'm going to start this process of discussing how do you get funded by going through the process of due diligence. It's basically the first thing you're going to run into when you're talking to a prospective investor. Due diligence is essentially a a way that the investor puts you and your team under a microscope to try to understand are there any issues, either legal issues or financial issues or even regulatory issues, that they need to be aware of. And per actual, perhaps could even raise concerns in their minds about making the investment. There's one thing you should understand about due diligence, it is a extremely tedious, often frustrating and very time consuming process. But you have to understand that even though they're asking you some questions that you might think are personal in nature, it's not personal. They're trying to uncover enough information to enable them to come to a conclusion on whether they want to invest in your company or not. And, and so the key to your success in addition to being prepared and cooperating with the investors, is to understand that they are looking for information to help them get to a yes on this investment. Approach it with that in mind, and I think you'll do fine. So due diligence is could, could be considered to be both an art and a science. The art aspect of due diligence is, you know, what questions to ask, how they should be asked, when they should be asked. The team that the investor will present to you to do due diligence is basically on what I call a search and destroy mission. And they're not looking to search out and destroy you as an invest, as an entrepreneurial or your company. They're looking to uncover problems and then, hopefully, eliminate them. Or at least have you explain the things that they uncover so that you can eliminate their concerns, and they can move on to the to the investment decision. The Science of due diligence is, they're going to give you a very comprehensive list of things that they want to see. A comprehensive list of questions they're going to ask you. And that helps them to basically organize and understand the data that you're providing. And it helps them to do a quantitative and qualitative analysis of their investment. And hopefully it helps them get to a decision that, that will result in a funding of your company. So what are they looking for? They're looking for a lot of things. They're going to talk about, you know, your team and their backgrounds and, and the structure of your company to make sure that it's been structured properly. Hopefully you've had some legal help along the way, so that your corporate organization is, is, your house is in order when it comes to corporate structure. But they're also going to be looking for things like overdue tax liabilities. My personal case, I was doing due diligence on a company when I was considering partnering with them, went through the due diligence process and found that they had not paid their payroll taxes for quite some time. That's a pretty serious issue, and that one issue basically not only delayed our, our decision on whether or not we wanted to partner. But it also stopped the due diligent process in it's tracks. The company said, we were unaware that this was an issue, and they went off to get that payroll tax issue resolved. They're also looking at what systems you have in place, whether or not you have adequate systems to support what you're doing. That maybe something as simple as simple as an accounting system. Or it could be a system for developing your product. Do you have the proper processes in place to do systematic and logical product development? They may look at whether or not you have a very small list of customers that you rely on. Or a very small list of suppliers that you rely on. An unhealthy reliance on either one or two customers or one or two suppliers, if one of those customers or suppliers disappears for some reason, it could have a si, significant impact on the company. And so therefore they get, they want to understand what customer list you have and what's the impact of one or more of your customers disappearing for some reason. Whether they, let's say go out of business, or perhaps they just decide to, to buy somebody else's product. They'll also look for anything like overdue payables, if you have accounts payable or accrued liabilities and you're not paying your bills on time. That's an evidence of, first of all, not very good corporate governance of the company on your part. It also could indicate that you got a problem with funding your company, or the cash is inadequate to allow you to continue. So that's, that's something they, they want to understand. And then they're going to look at your plan, your strategic plan, and your, and your forecast projections to see, what are you going to spend your money on? And does it, do you have an immediate requirement to have a major expenditure. One of the things that they really have problem with, is if you as a early stage founder and several of your management team have worked for what you tell them is basically sweat equity. And then they find out that you've been recording on that, on the balance sheet a deferred deferred salaries that you will be paying your team once you raise money. Investors look at that as a, as a negative thing. And more than likely most investors would negotiate that and to some way like converting into equity. Or simply just taking it off the, the books and having your team acknowledge the fact that part of what there job is to put equity into the company. And, and not expect major salary payments during the early stages of the company. There's a really comprehensive list of the type of questions that an investor might ask, in the suggested reading in Sherman on page 18. Take a look at that, that'll be helpful when you go through this process. So due, due diligence is a necessary evil. It has to be done before an investor makes a decision. It's extremely time consuming, it's very tedious. Do not take it personally. And by the way, while the investor's doing due diligence on you, you should be doing the same thing for them. You should be looking at the types of investments they have made in the past, what type of network they have, how they can help you one, once they make the investment, what introductions they can make. So due diligence is a two way street, and you should do your own due, due diligence on your investor before you agree to let them invest in you.
