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Why due diligence with venture capital is important

Some Colorado business owners who are seeking funding may be so relieved at receiving term sheets from an investor that they fail to do further due diligence. However, researching the venture capitalist ahead of time can give an entrepreneur an idea of how reliable an investment offer may be.

This was a lesson learned by one CEO. He had been contacted by a growth equity venture capital fund in regards to the needs of his growing company, and not long after, the fund submitted a term sheet. The CEO was pleased with the relative ease with which the financing had been secured since the fund had pledged half of what was needed. The plan was to get 25 percent from other investors and then secure a manageable 25 percent for the remainder.

However, at virtually the last minute, the investor pulled the term sheet. This put an end to the entire deal. The CEO later learned that four other companies had the same experience with the investor. In his haste to close the deal, he had failed to do any of the research that might have prepared him for this outcome or to identify red flags beforehand. Entrepreneurs should insure that investors usually fund terms sheets. They should not hesitate to ask investors about whether they have submitted term sheets but ended up putting a stop to the deal.

One option for entrepreneurs is to work with an attorney who can identify investors and manage the deal themselves. The attorney may know how to best represent the company to appeal to investors and which ones are reliable. Before getting to this stage, an attorney can also assist with writing a business plan that almost every potential source of financing will require.

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