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How to handle due diligence for your equity crowdfunding

When your early or growth stage company needs essential funding, equity crowdfunding can be an excellent way to achieve this.

How to handle due diligence for your equity crowdfunding

Looking at the websites for crowdfunding platforms, such as Seedrs and Crowdcube, you might think that companies simply post their pitch on equity, and gain investment. However, that’s not the full story. There are a number of steps that determine whether a company can even get listed.

Here, John Auckland from TribeFirst gives an insight into the due diligence process. He also highlights a few tips to give your company the best chance of getting past the crucial due diligence stage and speeding up what can sometimes be a glacial process.

The due diligence process

When investors browse any reputable platform, they can be confident that the investment opportunities are fairly sound. Investors know that giving their financial backing to any company comes with a risk, but they take comfort in the fact that platforms apply their own due diligence process to every prospective campaign.

This is where the platform looks very carefully at every claim the company makes – and I mean every claim – to make sure it is accurate, can be evidenced and isn’t in any way misleading. This will include all the content on your pitch page, including your video and team bios. It’s only after this rigorous vetting process that the platform will allow a company to pitch an opportunity to investors.

Often unaware of the challenge ahead, many companies fail due diligence and end up significantly delaying their campaign. Rather than deliberately trying to mislead the platform, failure is often due to being unable to evidence claims.

Can you evidence your team’s credentials?

When investors are deciding whether to back your company, they pay close attention to your team’s credentials. For this reason, team bios are an essential part of any equity crowdfunding pitch.

We’ve found the claims made in team bios often delay the due diligence process more than any other section of the pitch. It comes back to the fact that you have to evidence every claim you make – including your team’s career history. If any of the bios cite “20 years’ experience in marketing” or “spent two decades working as an accountant”, be expected to be asked for evidence going back 20 years to demonstrate this, including tax returns and payslips.

A better approach can be to pull out actual examples of companies your team members have worked for or concrete, provable achievements they made during their tenure. Again, these will have to be evidenced, and you can’t use LinkedIn or a CV!

So, a green technology company claiming that they used to work for the Environment Agency or the National Grid, for example, may need to show a contract or an email from the employer stating that they worked there, how long for, and what role they played.

Likewise, the CEO of a new challenger brand claiming they founded a company and sold it for £5 million will have to provide the documentation to prove the date they founded it and the sale price.

It’s also key to avoid vague statements or exaggerations, instead opting for clear, verifiable facts.

Former employers tend to take ages to get back and, as the platform will definitely ask you for their reference, it’s really worth chasing them up before you’ve even submitted your pitch page.

Have you checked all your numbers?

It won’t surprise you that investors will want to see some numbers to give them an idea of how your company is performing, a picture of the overall market, and how you can further tap into it.

It might sound impressive that you made 10,000 sales last month, or achieved a 300% sales growth in just one year, but can you demonstrate it? If you’re making claims like this, you’ll have to offer the platform a complete list of your sales and show your working.

As such, it’s important to keep your numbers in order. Even if your company is not yet profitable, you’ll need to prove that there’s interest in your product or service amongst your market. Finding reputable stats which show that X% of consumers complain about a problem you have a solution to can prove very useful.

It’s also worth locating original source industry figures which show how big your market is, including the current and projected future trends. Identifying and naming your competition in any documents you’re presenting to investors, and certainly in any docs you’ll be attaching to your pitch page, is another must.

Claiming that you have a one of a kind product or service when there’s competition out there will suggest that you either haven’t done your research or are trying to pretend that you don’t have any competitors.

Will your pitch video get through the process?

A key part of any pitch, your pitch video will allow you to communicate the opportunity you’re offering, the character of your brand and the expertise of your team in just a few minutes. Of course, many claims can be made in a short time, and just like any other document you’ll include in your pitch, your video will have to get past due diligence.

Companies that have made their videos in advance of the due diligence process can often fall into trouble. Any claims they can’t prove must be cut, and if they are many, the video will have to be redone, wasting time and money.

Unless you’re confident that you can evidence every claim, then it’s best to hold fire on making a video before you begin due diligence. This way you can write the script, show it to the platform, and ensure that they have no qualms with what you’ll be communicating to investors.

For obvious reasons, you’ll need to highlight any claims that will feature as on-screen graphics in your script when you show it to the platform, too.

So, make sure you treat your script like any other text you’ll be submitting to the platform. Analyse it line by line, have the clear evidence to hand, and you should be able to breeze through due diligence.

The due diligence process can be tough, and at times, frustrating. It’s also a crash course in how to get your house in order and hone your knowledge of your business and market in a matter of weeks. Trust me, it’ll act as the perfect training – you’ll be vetted all over again by many inquisitive investors once your campaign is live!

To be successful you need to start preparing for the due diligence process as soon as you can.

If you prepare thoroughly and can give the due diligence team at your chosen equity crowdfunding platform what they need, you’ll make them extremely happy and the whole process should flow smoothly.

More on crowdfunding for your small business and crowdfunding mistakes to avoid.

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