Due diligence describes a careful examination of a company which takes place when shares are acquired – it is usually initiated by the buyer or venture capital provider. The aim is to ensure as far as possible that the assumptions and conditions on which an investment decision in a company is based are correct, and that all relevant risks have been identified.
Certain areas are particularly important to VC investors, including financial due diligence (examination of the financial situation), market or commercial due diligence (market and business model analysis), tech due diligence (as the name suggests), legal due diligence (examination of legal aspects) and tax due diligence (examination of tax aspects). For software start-ups in particular, it is becoming increasingly important to clarify to what extent open source code can be used for commercial purposes (IP due diligence). Due diligence is carried out by experts in the different areas. Audits take into account various sources of information, in particular an analysis of company documents and data, as well as discussions with the company management. Further sources include an analysis of market data, discussions with potential partners or customers, and interviews with industry experts.
Positive DD checks constitute a significant milestone for an investment. Often, smaller issues that are found can be resolved or changed before the investment takes place. If, however, it turns out in the IP DD that a company is infringing fundamental patents or is not allowed to distribute a product commercially, this can also lead to termination of the process. Therefore, DD checks are a very important part of the investment process which entrepreneurs should be very well prepared for.