3 Tips for Venture Capital Due Diligence

May 05, 2024

In a classic episode of the popular This Week In Startups (TWIST) podcast, investor Jason Calacanis explored the topic of VC due diligence with Scott Orn, a former VC now with well-known startup CPA firm Kruze Consulting. Their in-depth discussion centered around a topic that often keeps startup founders up at night: venture capital due diligence.

As part of a series on "Startup Finance Basics," Calacanis and Orn shed light on the intricacies of the due diligence process, offering insights to help entrepreneurs navigate this crucial stage of fundraising. From common pitfalls to best practices, their conversation provided a wealth of knowledge for startups seeking to secure venture capital funding.

The Gravity of Venture Capital Due Diligence

As Jason Calacanis aptly put it, "If you get your accounting or finance issues wrong, the cleanup work can be colossal." At the earliest stage, financial diligence is usually quite light. However, as a startup matures, collects historical data, and generates growing amounts of regulatory paperwork, prospective investors’ diligence becomes more complex.

3 Tips for Acing VC Due Diligence

Be Prepared at All Times

Calacanis and Orn emphasize the importance of being prepared for due diligence at all times. "The single biggest error founders make is procrastinating," Orn notes. In both investors’ experiences, great companies can find that VCs can come knocking with game-changing offers unexpectedly. Being diligence-ready is crucial to seize those opportunities.

Understand VC Expectations

It helps to understand what VCs are looking for when they conduct finance diligence. VCs focus on three key areas:

  • Historical Financials: Ensure your financials are up-to-date and accurately reflect what you've told investors. It’s embarrassing if you pitch one amount of revenue and present a different one with your historical financials. 
  • Projections: Your model serves as a roadmap, projecting your startup's growth trajectory. Demonstrating potential is more important than perfection. Letting VCs know that you have a plan for using their money helps sell your company as a great investment opportunity. 
  • Tax Compliance: Don't overlook the importance of staying on top of your tax obligations. Missing deadlines can be costly, and incoming VCs don’t want their new money to pay for past mistakes. This becomes more important as a company matures, and later-stage investors are especially focused on avoiding companies with tax and regulatory mistakes.

Maintain Transparency and Truthfulness

Authenticity and transparency are essential in the venture capital world. As Jason Calacanis points out, "VCs are looking for a process they can believe in and is trustworthy." They don't expect perfection, but they do value honesty. Concealing information can jeopardize deals and reputations. And sharing books that are messy or that need to be revised can make a potential investor question your truthfulness, so going back to our first point, being prepared at all times is a great idea.

Leveraging Expert Guidance

Being a founder and building a successful business is a huge challenge, and every founder we work with is stretched pretty thin. It’s important for you to use every tool at your disposal, and one big strategy you should employ is getting help from experts.

This article was co-authored by Kruze Consulting and Bridge Bank, a division of Western Alliance Bank, Member FDIC.

Bridge Bank’s experienced Technology Startup Banking Group  understands the growing pains and opportunities of emerging growth companies and works with you to customize debt facilities and treasury management solutions to best position your startup for growth. Kruze Consulting works with over 800 startups and knows how to set up your financial infrastructure and accounting process so your financial records are current and reliable, and you’re ready for due diligence at a moment’s notice. With that support on your side, you’ll be in a great position to successfully fundraise. 

About Us

Bridge Bank

Bridge Bank, a division of Western Alliance Bank, Member FDIC, delivers relationship banking that puts clients at the center of everything. Founded in 2001 in Silicon Valley, Bridge Bank offers a full spectrum of tailored commercial banking solutions, as well as specialized expertise focused on life sciences and technology and innovation companies, at every stage in their life cycle, through its offices in major tech hubs across the country. Bridge Bank also serves the private equity and venture capital communities and provides business escrow services. Bridge Bank is part of Western Alliance Bancorporation, which has more than $70 billion in assets. Major accolades include being ranked as a top U.S. bank in 2023 by American Banker and Bank Director. As a regional bank with significant national capabilities, Bridge Bank delivers the reach, resources and local market expertise that make a difference for customers.