As angel investors and venture capitalists (VCs) have become more selective, securing the next stage of funding is increasingly challenging for entrepreneurs. Simply having a strong team, a compelling pitch, and a charismatic frontman is no longer enough. Entrepreneurs must present a well-prepared funding package to meet the rigorous due diligence requirements of serious investors.
Due Diligence Requirements Increase at Every Stage of Funding
Concept Stage
Most investors tend to shy away from opportunities at the concept stage. Entrepreneurs are more likely to secure funding from friends and family at this point. However, it’s crucial to start assembling a comprehensive funding package during this phase as it lays the groundwork for future funding rounds.
Read More: 10 Essential Questions to Craft a Powerful Vision Statement
Seed Stage
During the seed stage, the business concept undergoes vetting and validation. While friends and family are still key sources of funding, some angel groups may also be interested. Entrepreneurs must include specific documentation in their funding package including:
- Cost Structures
- Cap Tables
- Invention Assignments
- Corporate Formation and Structure
Read More: Crafting An Effective Elevator Pitch
Early Stage
As the product, infrastructure, and team development progress, the company enters the market. Angel investors are more prevalent later in this stage. The due diligence requirements expand significantly, necessitating over 100 additional items including:
- Trademarks, Patents, and Copyrights
- Schedule of Logos with Use
- Loan Agreements
- Milestones
- Sales Pipeline
- Licensing, Leases, and Agreements
- Tax Information
Read More: Entrepreneurial Inspiration for Recent Grads Seeking Startup Funds
Growth Stage
In the growth stage, the company focuses primarily on increasing sales. Funding typically comes from angel groups, super angels, angel syndicates, and VCs through Series A funding. Most of the necessary documentation will have been prepared in earlier stages, but investors will now concentrate on:
- Success in Initial Sales Efforts
- 3rd Party Agreements
- Insurance Protections
- Litigation Matters
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Mezzanine Stage
At the mezzanine stage, the company is poised for significant scaling. This phase is usually financed by VCs through Series A or B rounds. While there are some additional items to include in the funding package, the primary focus of investors will be on the company’s success to date.
Conclusion
To impress investors and secure funding, entrepreneurs must be prepared with a comprehensive and substantive funding package that meets stringent due diligence requirements at every stage of development.