By Upasana Sharma, Canada Immigration Lawyer
Our due diligence process is one of the many unique advantages you will have in your Start-Up process by working with IQ Canada. There is a lot of noise regarding the Start-Up Visa program and a lot of empty promises. Do you want to leave your future in the hands of some group that provides you with some simplistic template that hasn’t worked for others? At IQ Canada, we have some of the most long-serving immigration lawyers and consultants telling us that our due diligence is the industry’s gold standard.
Due diligence is one of the most essential parts of building and operating a start-up. It is also one of the most frequently underappreciated parts in the process of creating, maintaining, and growing a company and is a primary reason for failure in the Start-Up Visa Process.
It can indeed be one of the hardest things for a founder and company to go through. It will almost always certainly take longer and be more work than you expect, but it is one of the essential keys to success.
What Is Due Diligence in Start-ups?
Due diligence is often discussed, yet rarely fully appreciated until entrepreneurs are right in its midst. Right when they are feeling the pain of learning it the hard way.
There are two main occasions when due diligence arises. They arise during fundraising, exiting, or during an M&A activity. This may also occur when seeking insurance, licensing, filing and complying with regulations, and leasing.
The most common form of this will arise at each attempted round of start-up fundraising or in the case of the Start-Up Visa application, when applying to the Designated Entity. This is the most intensive and thorough part of the process. There may be similar types of underwriting and investigation done when applying for various other types of financing.
But, if you are not prepared for it, the first real due diligence experience can be a real shock to the system.
It Will Make or Break Your Company
Due diligence is the key to being accepted by the Designated Entity and IRCC, raising capital, merging companies, making strategic acquisitions, and finally exiting or taking your company public. You won’t be able to do any of these things without getting through due diligence.
If due diligence is a struggle for you and for your company, it will make every attempt in raising money, growing it, and getting to the next level an unappealing chore.
From the other side of the table, it will also be less likely that designated entities and IRCC, investors, and acquirers will follow through, especially when they may have many other competing start-ups and companies vying for their dollars and partnerships.
Even if you get through it, it can set the relationship on the wrong foot if it is a nightmare for the other party. This can sour the future together before you even get started.
Revealing Your Secret Sauce
While this should certainly be a secondary concern to getting the funding or acceptance you need for growing your company, unscrupulous entities and bad actors will use this process to learn the ins and outs of your business and then use it for their interests.
That may be investing in the competition against you, directly competing against you, or disclosing sensitive information to others.
Disrupting Versus Uniting Your Team
The due diligence experience can substantially impact your team for better or for worse.
It can bring you together, strengthen you, and help you to boost your performance and unity. At least if you orchestrate it well.
On the other hand, if you have not prepared well, don’t empower them to do their best. As they are fragmented in your stand on this round or exit, it will be a mess. It can drive a wedge and create dissension in the ranks and leadership.
It Can Make or Break You
This will be one of the hardest things you’ve ever experienced up until this point. Even more so than taking the leap of faith to try and bootstrap a new business idea or to go pitch hundreds of investors despite receiving just as many noes.
There may be rare rounds when things do sail through. Just don’t expect it.
If you are not mentally prepared for this leg of the journey, it may break you. If you do not resolve to persist through it and you quit, the end of your business will follow quickly behind.
Fortunately, there is a lot you can do to make it easier, more palatable, and more efficient. You have to be informed, strategic, and take action in advance.
Why Is Due Diligence So Important For Designated Entities, IRCC, and Investors?
Understanding What They Are Investing In
You might have an outstanding sales pitch that gets them excited and eager to throw down an appetizing term sheet, but then they need to get to grips with the reality of what they are investing in.
Is there real substance behind the pitch deck? What do you have and have achieved? Trust me, trying to come in with a business that is only based on fluff will get caught at this point, and all applications will be rejected!
This is a financial transaction for investors. This means that they both need to look at a realistic economic forecast based upon some tangible proof of concept or sales data and the actual value of assets, like intellectual property, or hard assets like real estate.
What liabilities and risks are their investments going to be exposed to? It could be operation, legal, market forces, or other risks. When balancing their overall portfolio and potential for average returns across their invested start-ups, they need to calculate that.
Legal & Financial Responsibility
Investors typically also have legal and financial responsibilities to others, too. VC firms and start-up accelerators will have LP investors whom they are responsible for. They have to repay them. If things go wrong, they can be sued if they didn’t conduct a reasonable amount of due diligence on the investment.
What Due Diligence Is Involved?
Among the many parts of this process, you can expect the following.
Vetting The Founders
Founders and other key players can make or break a company and investment. This is not only about their abilities but also about scruples and integrity. Even Mark Cuban has had to step in and take over start-ups due to rogue founders.
They want to know that you aren’t putting their investment at risk. You will not be engaging in Twitter wars that will damage the company. Or won’t be lying to the press and misleading the public about the business.
Reviewing the Organizational & Financial Structure
The quality of the founding team is essential. More so about, who the other executives, key team members, and investors and owners are.
Acquirers and investors want to understand what debt there is, how the ownership is split, who is on the cap table, and their rights in the next round or other liquidity events.
They will want to interview your actual customers. They will want to know how happy they are and how likely they will stay as paying customers. They want to make sure the product does what you claim. Or, if you are pre-revenue, they will want to see LOIs of companies willing to engage your product when it is launched.
Investors and acquirers must verify patents, trademarks, and other intellectual property. They will also want to know that you have filed and owned it and how much it may be worth.
Verifying Financial Statements & Forecasts
Expect them to go through every dollar and document. They will likely also create their forecasts and potential outcomes. Often, these may be even more bullish than yours. However, poor accounting can undoubtedly detract from your valuation.
Investors and buyers may use various methods and approaches to value your business. This will depend on their preferences, the stage of business, what they intend to do with it, how they will fund it, and how the transaction is structured.
Careful attention needs to be applied to pending lawsuits, litigation, or settlements.
Risks & Assets
They will need to review customer contracts, retention versus churn rates, and employee contracts, as well as evaluate the value of individual assets and their liabilities.
How to Ace Due Diligence
How can you improve the due diligence process to preserve and add value, keep these parties motivated, and make it go faster and less painfully?
Your pitch and deck are sales tools. Be honest upfront in your pitch, and it won’t fall apart in due diligence.
Have Your Team United
Before entering any of these processes, your whole team should be united on the goal. This includes your workers, cofounders, shareholders, and board members.
Be Organized & Keep Clean Records
Please don’t wait until it’s due diligence time to try and pull everything together and catch up on your taxes or other accounting and paperwork. Take the time to create systems and processes in advance. Prepare a data room for your due diligence in advance of pitching.
Be Prepared Mentally & Financially
Be prepared for how long this will take, how hard it will be, the extra labor, meetings, hours, and stress. Brace yourself for the emotional roller coaster, negotiation tactics, renegotiation, and plan for the costs to your business for all of this.
This will allow you to stay strong, stay the course, and still get a great deal.
Due diligence is highly pivotal for start-ups. One of the most influential parts of building a business is fundraising through your exit.
There is a lot involved. Yet, founders also have much control over the process and how well it goes.
Invest in learning about it and preparing for it, and it will be far more profitable and palatable when the time comes.
Before signing with an agent or a group regarding the Start-Up Visa program, ask to see their due diligence process. If they don’t show you, then likely, they don’t have one, and your chance of being accepted into the Designated Entity or the IRCC is low.
Contact us today and let us walk you through our due diligence process so that you can rest assured that the most professional team in the industry can walk with you through your PR Journey.
Do you require more help with your Canada startup visa or immigration needs?
If you’re interested in other pathways for immigration to Canada, we’ve also prepared an article to help you learn about how to immigrate to Canada with a work visa. And if you want to learn how to start your own business in Canada, we have just the right article for you!
Investor Quotient Canada is a premier professional services firm offering a suite of business, legal, logistical and related services to foreign innovators and entities looking to establish and/or expand their operations into Canada or invest in Canadian businesses.
IQ works with start-ups at all stages and welcomes an opportunity to speak with you about any of your start-up needs, from helping to develop the concept to raising the necessary funds to move forward. Contact Upasana and book a consultation.
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