Due diligence is an essential part of the fundraising process but it can take up precious time that should be spent by the founders working on their business. It can be difficult to manage the continuous flow of requests from investors for information, which could delay the closing of a funding rounds.
The level of due diligence in fundraising varies depending on the stage of the startup, as well as by the type of investor. For example, a seed-stage company must be prepared provide details to equity investors such as venture capital firms and angel investors, while companies at later stages may need to satisfy institutional investors with more rigorous due diligence.
Tools that automate these searches will reduce the workload on staff and also the time required for due diligence in fundraising. Donor prospecting and screening software, for instance it will automatically scan the Internet for public data on donors, their businesses and associations. This will save time and effort when compared with manual research and ensure that all possible risk factors are covered.
Due diligence in fundraising involves not only looking for information about a potential investor but also setting up policies on the kinds of donations an institution will accept or reject. These can include policies preventing the giving of money or property through non-legal means and guidelines to prevent any donor from exercising influence over the institution’s staff, trustees or programs; and rules regarding naming guidelines.