The digital revolution has brought in massive disruption with technology consistently advancing over the years. With that the culture of start-ups only seem to get more chaotic over the rapidly changing times. There has been a major paradigm shift.
Investors intending to inject funds into start-ups also run background checks and it works vice-versa. That way start-ups need to conduct thorough due diligence on their investors, vendors, partners, etc. to clearly gauge their capabilities and competencies. An exhaustive due diligence is inevitable for budding organizations especially, seeking debt and equity financing. Hence, due diligence is important on both sides of the table. A recent news reported how 52,911 profitable Indian companies pay zero tax so how do they make it possible? It is acceptable for companies partnering with them? It is very important to look through the pros and cons of an investment before putting in scarce resources and money.
The reasons for start-ups to perform exhaustive due diligence: To identify any issues with the partner/business that must tidy up before any settlement is agreed upon. To spot issues that could be turn out to be deal breakers Availability of limited resources with the start up Alliance with reputable partners Synergy of abilities, competencies, etc. It was observed that many-a-times companies revoked contracts due to directors of partnering firms demonstrating certain behavioural concerns at the management level.
We have seen some aspiring entrepreneurs bearing the brunt due to some bad decisions at the brink of their ventures. Financial institutions are bound by a regulation called KYC (know your customer). Companies also follow similar KYC for investors/partners. You should want to know who is investing, why are they investing, who are they, how they earned their money, what is their risk attitude and appetite and other such valuable points. A thorough due diligence helps to know the promoters and their intentions as a part of an investment decision-making process.
With the growing instances of frauds and the increasing regulatory watch on investments, this ensures that investees are entities of repute and can safely operate and grow in an increasingly global business environment.