Kruze Consulting clients have raised over $4.5 billion in venture capital funding, and on average one of our startup clients is acquired a month. We know how quickly investments and acquisitions can come together, and recommend that startups are ready for due diligence ahead of time.
Once your startups accounting and HR systems are in place, it makes sense to be aware of what materials you’ll need to complete a venture capital fund raising process.
Every venture capitalist has their own due diligence process, but they typically share a due diligence checklist with the startup so that the management team can collect the requested information. We’ve compared finance, tax and HR due diligence checklists that our clients have received from top tier venture investors, and created a detailed checklist.
This due diligence checklist is quite detailed. It’s unlikely that you’ll receive a due diligence checklist that is as detailed as the one we’ve created. But, if you have these materials ready prior to starting a fund raise process - or at least know where to get them - you’ll be in better shape to sail through this part of the diligence process. Plus, you’ll look more organized as a management team if you are quick to produce these materials.
We strongly recommend working with an accountant who has experience with startups and the venture fund raising process. Only about 1% of “startups” go on to raise a Series A. You don’t want your startup to fail to raise venture capital because of some outsourced bookkeeper didn’t “get” how startup accounting works. There are a handful of CPAs, like Kruze Consulting, who specialize in helping funded startups - choose someone who knows what they are doing and who can be your partner in the venture process, not someone who will slow you down and make your team look unsophisticated!
One caveat to this due diligence checklist: VC’s will also conduct legal, sales and marketing, technology, market and other categories of due diligence - and they will want your capitalization table and other stock details - which we do not cover in this list.
Download the list here, or use the chart below.
|Income Statement||Last 3 years by month and by year||High|
|Balance Sheet||Last 3 years by month and by year||High|
|Cash Flow Statement||Last 3 years by month and by year||High|
|Financial Projections (Income Statement, Cash Balance)||Next 3 years by month and by year||Explain the key KPIs and how they change as the company matures||High|
|Bookings History / Projections||Last 3 years next 3 years by month and by year||For companies with sales teams||High|
|AR Aging and Projections||Current period||Include and AR greater than 90 days past due||Low|
|Deferred Revenue Details and Projections||Highlight the product or service associated with major deferred revenue positions||Low|
|Schedule of bad debt and write offs||Recent period, near-term projections||If anyInclude any material projections||Low|
|Inventory||Current period||Value by SKU Include aging and any amounts deemed obsolete||Low|
|Accounts Payable||Current period||List of any employees or service providers that are unpaid, have not been paid in full to date, or are subject to any payment deferral arrangements||Low|
|Name of Current Accounting System||Current||And the date started using the system||Low|
|Name of Current Payroll System||Current||And the date started using the system, and payroll schedule (weekly, bi-monthly, monthly)||Low|
|Contracts and Invoices for top 10 clients||Current Period||Not relevant if not an enterprise sales model||High|
|Contracts and Invoices for any churned clients||Last 6 months||Only material clients||High|
|Leases||Current Period||Any agreements concerning the purchase, lease or sublease of real property, any personal property leases.||Medium|
|Material Contracts||Current||Any agreements, understandings, instruments, contracts or proposed transactions to which the Company is a party or by which it is bound which involve obligations of, or payments to, the Company in excess of $20,000||High|
|Cost to Acquire Customer||Current and Previous Year||Highlight expenses included and excluded||High|
|Customer LTV||Current and Previous Year||Explain the assumptions behind the calculation||High|
|Customer Churn Rate||Current and Previous Year||Explain any changes in churn rate||High|
|Federal Tax Returns||Last 3 years||High|
|Local / State Tax Filings||Last 3 years||High|
|Correspondence with tax authorities||Since inception||Federal, state and local - any correspondence between the Company and the IRS or any state or local tax bureau or any federal, state or local governmental authority||High|
|409A valuations||Last 2||Copies of Internal Revenue Code Section 409A valuation reports.||High|
|R&D Tax Credit Reports||Current Period||Medium|
|Organization Chart||Current||Who reports to whom||High|
|Salary Schedule for All Employees||Current||Showing title, current base salary and bonus for all employees; include any obligations to terminated employees, highlight any changes to salaries, bonuses or compensation to employees after the transaction||High|
|Consultants||Current Period||List of consultants, role and cost||High|
|Projected Hiring Plans||Next 3 Years||Projected hires by month, with title and projected compensation||High|
|Transactions with Officers||Current Period||Any existing or proposed agreements, understandings or transactions between the Company and any of its officers, directors, material stockholders or any affiliate including, without limitation, non-competition agreements, employment agreements and non-form offer letters||High|
|Insurance||Current Period||Any insurance policies (including documentation regarding workers’ compensation insurance) held by the Company or of which the Company is a beneficiary and a summary of such policies, if available||Medium|
|Offer Letter||Current Period||Copy of the Company’s standard offer letter||Medium|
|Special Employee Agreements||Current Period||All employment agreements and other documents (such as offer letters) that contain change of control, severance provisions, bonus provisions or acceleration of stock or option vesting||Medium|
|Employee Benefits||Current Period||Any employee benefit plans and arrangements, including, without limitation, stock option plans, bonus plans, pension plans, 401(k) plans insurance plans and forms of agreements (including copies of all form of option and stock agreements that are in use)||Medium|
|Employee Accrued Expenses||Current Period||A list and breakdown of all outstanding accrued salary, paid time off, and reimbursable expenses.||Medium|
|Foreign Employees||Current Period||If the Company has any foreign employees, a list (separated by country) of all benefits provided to foreign employees, and their locations||Medium|
A venture capital due diligence checklist is a list of questions that an investor will share with a company that they are evaluating. The VC's due diligence checklist contains a list of questions and materials that the VC will want to see in order to understand the company's operations, financials, market, legal/tax compliance, etc.
The level of complexity in a due diligence checklist tends to increase the greater amount of funding that the company is raising or the later the "round" is (i.e. a Series D checklist is typically more exhaustive than a Series A checklist).
VC due diligence can take as little as a single meeting to months and months. The best companies that we work with tend to have on-going conversations with potential venture capital investors well before they formally begin a fundraising process - and these companies typically can get through due diligence in two to four weeks. From a cold pitch, where there is no previously existing relationship, due diligence usually takes a bit longer, but hopefully less than six weeks.
Recently, Kruze Consulting’s COO, Scott Orn, was invited to be a guest on Jason Calacanis’ highly-ranked This Week In Startups Podcast. In part-one of the series, they discuss how to ace due diligence and how to avoid common mistakes. It is a must-watch for startup founders looking to raise venture capital.
"After 200+ investments, the one thing you have to get right is due diligence,” said Jason Calcanis.
On this episode of the Startup Fiance Basics series, Kruze’s COO Scott Orn and Jason Calcanis, angel investor, author and podcast host discuss:
Of course, we suggest working with an experienced startup-focused accounting firm, like Kruze Consulting, well before your startup is in the due diligence phase of an important transaction.
We’d be happy to help you out. Just set up a time to talk with us.
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Startups are our niche, and our passion. Our clients have raised over $4.5 billion in venture capital financing. We are one of only a few outsourced accounting firms that specialize in funded early-stage companies - we only offer financial and tax services to fast growing startups in the Seed, Series A, Series B and Series C stages.
We know how to de-risk your startup’s next venture capital round. Our team makes sure you are ready to fly through your next VC’s accounting, HR and tax due diligence. And when you use us as your bookkeeper, we set up and keep up-to-date a due diligence folder so you can get that next round of fundraising.
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Kruze Consulting works with a variety of funded Delaware C-Corps, but the majority of our companies have secured Seed, Series A, Series B and Series C. We look to partner with our clients, going beyond the typical outsourced accounting relationship and seeking to provide a higher level advisory role. We feel honored to be a part of making the world a better place, even if it’s one debit and credit at a time.
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