Tips on due diligence in startup investing

Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice. 

Due diligence, in short, is a thorough investigation into a company you potentially want to invest in. With large, established companies listed on a stock exchange, this process is fairly easy. You can use the internet to quickly look up performance history, company records and analyses by experienced professionals to help inform your decisions. With startups, however, the process of due diligence is often harder. 

As new companies which are likely making a loss – not even breaking even in the early years – there is no years/decades-long historic record to refer to. Moreover, startups have a very high failure rate (i.e. about 90%), whilst publicly-listed companies are likely to remain in business for some time. Yet despite these drawbacks, millions of investors around the world commit their capital towards promising startups due to their huge potential for growth. The risk is higher, yes. However, choose the right investment and the return could be staggering.

How does an investor conduct appropriate due diligence on a startup in 2021? In this guide, our investment team at Bure Valley Group offers some reflections below. We hope you find value in this content. Find out more about our EIS and other investment opportunities by visiting our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:

+44 160 334 0827

 [email protected]

 

#1 Exit strategy

You hope, of course, that your startup investment will succeed. However, since failure rates are still high (even after doing thorough due diligence), it is crucial to have an exit strategy before committing any capital. Ideas include:

  • Initial public offering (IPO)
  • Merger & acquisition.
  • Buyout by a larger company

 

#2 Loss-mitigation schemes

Here in the UK, there are a range of government-backed schemes to encourage investment into promising startups. These offer tax incentives such as loss relief, which minimise capital risk. The Seed Enterprise Investment Scheme (SEIS), for instance, offers investors 50% income tax relief on their SEIS-qualifying investment. So, suppose you invest £10,000 into a startup. This means that your “at risk capital” is only £5,000. Moreover, under SEIS rules you can also claim loss relief in the event that the company fails. This is equivalent to your highest rate of income tax. So, if you are in the additional rate bracket, you can claim back 45% of your at-risk capital.

 

#3 Diversification & partnerships

Another way to mitigate your risk is to spread your investments across a wide range of startups involving different sectors, countries and business models. Moreover, you could seek a partner to split the capital and risk into a particular startup, so you do not lose as much if it fails.

 

#4 The startup checklist

With these initial ideas in place, there is a standard due diligence checklist you will likely want to work through when vetting your startup investment prospects. These might include:

  • Intellectual property (IP). Does the startup own the necessary IP and patents to protect their business logo, products, ideas, code and domains?
  • Team. Who is running the show? What are their characters and personalities like? Which qualifications, skills and experience are they bringing to the table? How much “buy in” does each member of the team have in the business vision?
  • Market size. How many potential customers are there for the startup to reach with its products and services? Could it easily pivot into other markets if it wanted to? 
  • Competition & market share. How many existing companies are already offering similar solutions to the target market, and what is their market share? Why would the audience consider departing with trusted, established brands in favour of the startup’s proposition?
  • New entrants & pivoting. How easily could other businesses and startups enter the field that your startup prospect wants to occupy? Is there a high barrier to entry which would deter this from happening too frequently, thus threatening growth potential? Additionally, how easily could large companies in other industries/sectors pivot to offer the same set of products and services to the startup’s target market, thus scooping up market share?
  • Product/code review. What is the quality of the startup’s product (i.e. for a B2C retailer), or how robust is the code for a SaaS company (software as a service)? For the latter, is the platform able to be scaled easily to meet rising customer demand?
  • Financials. How well has the startup’s revenues been managed, to date? Where has it been invested/committed, and do these management decisions appear well-grounded? 
  • Digital strategy & presence. A startup is unlikely to have its website featuring at the top of Google search engine results, since this takes time to build. However, the business should have a viable digital strategy in place, along with evidence of meaningful activity on their marketing channels exhibiting engagement with the target audience. Marketing will be the engine that helps drive the startup’s growth, so the plan needs to be clear, viable and measurable to reassure investors and improve results over time.

 

Conclusion & invitation

Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:

+44 160 334 0827

 [email protected]