Why Entrepreneurs dread Due Diligence

One of the terms which inspire terror in most entrepreneurs’ hearts is “due diligence”.

This is the time when investors will poke, probe and prod. They will open your kimono and look into your company’s bowels. They will scrutinise your book of accounts; quiz your customers; grill your suppliers, in order to find out whether you’re worth investing in.

This can be quite scary because you’re always worried about whether they will uncover the skeletons in your cupboard.

We all have skeletons we have done our best to hide!

You are not sure whether you’ll be able to pass their tests, and this can create a lot of anxiety. Part of this is because most entrepreneurs have been so focused on running the company and making sure that operations are running smoothly so that they can acquire paying customers, that they often don’t bother about niceties such as accounting or governance.

This is the one thing which investors are focused on because they need to make sure that everything is shipshape before they will put in money into the company.

Due diligence is a bit like exam time, and entrepreneurs don’t look forward to it. But they need to change their perspective. If they really want to grow, they should actually look upon it as an important test from which they can learn a lot.

It will help them plan for the future, because if you want to remain more than just a small startup and if you feel that you’re mature enough to be able to absorb the investors’ money, you need to be able to show that you’re capable of meeting the high governance standards which investor demand in order to protect their money.

If due diligence is performed well by an investor, then irrespective of whether he finally decides to give you money or not, the process can provide you with very valuable insights into your company. This is usually the stuff you know which needs to be fixed, but which you have never got around to doing because you have been too busy fighting hundreds of other fires in order to remain afloat.

The truth is that none of us wants to accept our failures and we’d rather bury them under the carpet, but the due diligence exercise will not allow you to shy away from your lacunae, and you will be forced to fix these.

This is a great chance to get your act together, both internally as well as externally. If you had to pay a consultant to do this, they would charge you an arm and a leg, and your investors are doing this for free which means it’s a great bargain!

You will also get valuable insights into the investors’ worldview, which will stand you in good stead – not just for this round of funding, but for the future as well. You will learn what investors are looking for, and you will also find out whether you’re capable of providing this.

The truth is that none of us wants to accept our failures.

On the other hand, you may realise that this is just not your cup of tea, and you’re quite happy continuing growing slowly as a lifestyle business. After all, taking on the responsibility of accepting money from outsiders means that you become answerable to them, and this will be an ongoing burden you may not want to bear.

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Dr Aniruddha Malpani is a consultant IVF specialist, who runs one of India’s leading IVF clinics at www.drmalpani.com, along with his wife, Dr Anjali Malpani. They have founded HELP, the Health Education Library for People (www.healthlibrary.com), which is India’s first Patient Education Resource Center. He has authored many books, including: How to Get the Best Medical Care; Successful Medical Practise; Using Information Therapy to Put Patients First; and Patient Safety – Protect yourself from Medical Errors which are available for free at www.thebestmedicalcare.com. His passion is patient empowerment; he believes that using Information Technology to deliver Information Therapy to patients can heal a sick healthcare system. He is also an active angel investor (www.malpaniventures.com).

(It was first published on LinkedIn).