Overview
In India’s startup ecosystem, access to capital often hinges on successfully passing an investor’s due diligence process. Initial due diligence is the first and most critical filter before any investment moves forward. Understanding what investors assess at this stage is essential for founders seeking to raise external capital.
Key Focus Areas During Initial Due Diligence
1. Entity Structure and Registration
Investors expect a clean and properly registered entity, preferably a Private Limited Company. Clarity on ownership, shareholding patterns, and compliance history is fundamental.
2. Founders’ Background and Equity
Investors review founders’ experience, educational qualifications, prior ventures, and current roles. Equity cap tables must be updated, with clear records of share allotments and transfers.
3. Statutory Compliance
Up-to-date filings under the Companies Act, Income Tax Act, and GST regime are essential. Delays or lapses in TDS, PF, ESI, or MCA filings are viewed as red flags.
4. Financial Records and Forecasts
Audited financial statements, management accounts, and revenue forecasts are scrutinized. Clarity in expense categorization and validation of revenue sources improves confidence.
5. Contracts and Legal Agreements
Investors expect copies of vendor contracts, employment agreements, ESOP plans, and any customer MoUs. Legal gaps or informal arrangements can derail funding.
6. IP Ownership and Licensing
Startups must demonstrate ownership or legal licensing of any core IP, such as software, trademarks, or designs. Investors avoid situations where IP is not secured by the company.
7. Regulatory Licenses (if applicable)
Startups in fintech, healthcare, and other regulated sectors must have necessary licenses. Operating without them can lead to deal cancellations.
Founders' Checklist Before Approaching Investors
- Ensure clean and up-to-date ROC, tax, and GST filings.
- Prepare cap table and founder equity documents.
- Consolidate signed contracts and agreements.
- Review financials for consistency and accuracy.
- Verify IP registrations and licenses.
Conclusion
Investors prioritize startups that demonstrate governance, transparency, and regulatory alignment. Founders who proactively prepare for due diligence improve their odds of closing successful fundraising rounds.
