5 Mins
Raising external investment is a crucial milestone for any growing business. Whether you’re scaling operations, launching new products, or entering new markets securing funding can be transformative. But before investors commit their capital, they need to be confident in your business’s potential. That’s where due diligence comes in.
Having worked closely with both companies and investors, as well as gaining firsthand insight into an investment committee during a secondment, I’ve seen what can make or break a deal. It’s not just about presenting strong financials; investors need to see alignment with their strategy, a clear market opportunity, and a well-thought-out plan for sustainable growth. In this guide, I’ll walk you through some key areas of fundraising due diligence and share insights to help you navigate the process successfully.
1. Investor Alignment: Find the Right Fit
Fundraising isn’t just about securing money; it’s about finding the right investor who shares your vision. Investors have their own missions, investment thesis, and potential ESG (Environmental, Social, and Governance) considerations. If your business doesn’t align with their strategy, they’re unlikely to proceed, no matter how strong your numbers are.
It’s worth asking yourself:
- How does my business align with this investor’s portfolio and priorities?
- Can I clearly articulate how my company meets their investment criteria?
- Have I addressed ESG concerns in my business model and operations?
Understanding this early on saves time and allows you to tailor your pitch effectively.
2. Market Opportunity: Make it Tangible
Every pitch deck highlights a vast global market size, but while this provides context, investors are far more interested in your immediate addressable market – the customers you can realistically reach today. I’ve seen investment committees grow wary of overly optimistic market projections. Instead of focusing on the total addressable market (TAM), break it down into:
- Serviceable Available Market (SAM): The segment of the market you can realistically reach with your current product and resources.
- Serviceable Obtainable Market (SOM): The portion of SAM you can secure given your competitive position and execution capability.
Investors want to know: Where do you start? What’s the plan to capture market share? How does that progress over time? A realistic and phased approach reassures them that your growth expectations are grounded in strategy, not wishful thinking.
3. Financial Forecasts: Avoid the “Hockey Stick”
A common pitfall in fundraising is overly aggressive financial projections. Every investor has seen a “hockey stick” growth curve – where revenue suddenly skyrockets after a modest start. The reality? Growth is rarely that smooth.
Your financial model must be built on solid, transparent assumptions. Investors will closely scrutinise key areas, including:
- Revenue drivers: How will you acquire customers, and what’s your churn rate? Do you have data or precedent to support your assumptions about customer adoption?
- Cost structures: Are you factoring in scaling costs—hiring, production, and infrastructure? Are you relying on economies of scale, and if so, are they realistic?
- Hiring: What roles are critical to achieving growth, and when will you need to hire? Are your compensation structures competitive? Is your head office well-positioned to attract the right talent?
- Cash runway: How much funding do you truly need to reach key milestones? Have you built in a buffer for unforeseen challenges?
I’ve seen investors repeatedly challenge companies on whether they’ve fully considered their working capital needs. Many underestimate how much additional capital they’ll require before reaching their next funding round. Be clear on how far your current raise will take you – and ensure your model reflects reality, not just optimism.
4. Get Your House in Order
Venture capitalists spend an average of 118 hours conducting due diligence before making an investment and they will expect quick access to key documents. Delays in providing information can raise concerns about transparency or disorganisation. Before starting the process, ensure you have:
- Up-to-date financial statements and forecasts (with clear assumptions behind them).
- A structured data room containing legal documents, customer contracts, and compliance records.
- Evidence of traction – customer testimonials, revenue trends, or proof of product-market fit.
Engaging an external adviser can help you identify and address potential issues before investors do, ensuring a smoother process.
5. Show Investors How They’ll Get Their Return
Investors need to understand how and when they’ll see a return. If your company has raised prior funding, it’s crucial to outline how those investments affect the current opportunity.
Key questions investors will seek answers to include:
- What is the likely exit route – trade sale, IPO, secondary buyout?
- How long will it take to achieve a return?
- Are there existing investor preferences or liquidation stacks that could impact returns for new investors?
One common concern I have seen among investors is whether preferential terms from previous investors might reduce the attractiveness of a new funding round, particularly if earlier investors hold preferential rights that could significantly reduce returns for new entrants.
Final Thoughts
Fundraising due diligence is more than a checkbox exercise – it’s an opportunity to demonstrate your business’s potential while building investor confidence. Being prepared, realistic, and transparent is key to securing the right investment on the right terms.
At Henderson Loggie, we help businesses refine their financial models, align their strategy with investor expectations, and navigate the due diligence process effectively. Whether you’re raising capital for the first time or preparing for a larger funding round, we can support you in making a compelling case to investors.
For investors, ensuring thorough and effective due diligence is critical to making informed decisions. Our team can support you in identifying key risks and opportunities, and offering detailed insights into the businesses you are considering investing in.
Whether you’re seeking guidance on your first funding round or require expert due diligence to evaluate a potential investment, our team is here to help. Reach out to us today to discuss how we can support your goals.
Corporate Finance Manager
I’m passionate about working with Scottish owner-managed SMEs to help them achieve their growth ambitions. My work spans M&A advisory, fundraising, financial modelling, and due diligence, with a focus on unlocking value for businesses and ensuring they’re well-positioned for success.
I also work closely with private equity investors, providing the insights and support needed to enable their investment decisions and foster value creation within their portfolio companies.