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Investment Due Diligence: An Investor’s guide to making rational ‘Investments’


Table of Contents

Investing in scalable business models and upcoming technology seems to be the new trend. With thousands of ideas floating around with billions of people, investors are finding a tough time in making decisions! Ideas are not enough…

Rightly said, investors need to probe into teams behind the idea. Thorough due diligence of your target investee’s background and financial state is a must do! In addition to this, validation is conducted using social profiles like LinkedIn, Quora etc.,

to check on for their online presence, reputation, market position, partners, etc. So are you planning to invest in businesses? Have you conducted thorough investment risk due diligence on them?

The Investor’s checklist

  • Company Vitals- Investor’s should probe into basic company vitals Company Vitals like CIN, incorporation details, address, directorships, capital, contact information and more.
  • Directorships- Check for detailed information about the company’s directors and their directorships in other companies. Probe into possible relationships with present and past directors and more.
  • Charges- Investors should get access to details of securities/collaterals provided by the company to its lenders.
  • Financial Details- Check information on company’s financials including Balance sheet, P&L statements, Capital Structure, Financial Ratios and more. This is also available with MCA (Ministry of Corporate Affairs)
  • Compliance Check for credit rating of the company and related information regarding negative records like defaulters list, criminal and civil litigation records, reported activities in media and more.
  • Related Companies Check for information related to holding companies, subsidiaries, joint ventures and associated companies.
  •  Watch out for farce valuations. Overly complex financial projections do not give investment the right direction and goals. The planner needs to have full clarity about the ideas, roadmap, and innovation to scale into newer markets.
  • Interest for full research of the important content including interactions, advice and connections are the most useful before finalizing on a company for investment.These are trivial things that one should be looking for when it’s specifically a start-up/ new venture. (Read more) It’s equally as applicable to for established businesses but beginners need to be way more cautious. The early stages of a business is serious stuff. Good Investments Lead to Better Future Results There are multiple episodes of people who had investments of quality of where their second tranche of money was seized due to past reputational damages and numerous nefarious acts.Additionally, there are stories of companies that conducted full power due diligence on the opposite party and they turned out to be fugitives/convicts/criminals. As you can probably imagine, having someone like that on your cap table is going to make it a lot less likely. Experienced Due Diligence agencies, background verification companies and experts can help you with valuable information. Don’t be afraid to ask references and be thorough with your research about the person who you’re granting money. If they’re sufficiently motivated and interested, they will happily do so. If you’re sufficiently smart, you’ll be out there for exhaustive background check on the company. And if feels sketchy, you need to think about casting a wider net.

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