Due Diligence, what does it really mean?

"Due diligence" is a phrase used to describe a range of assignments, legal obligations, reports and investigations which take place in business, manufacturing and law. Its most frequently heard version is the one pertaining to business, where "due diligence" refers to the steps taken by venture capitalists before investing a round of capital in a startup, the ongoing investigation as to how the funds are being distributed, or the precautionary steps taken by a larger company in deciding to acquire a smaller company.

In venture capital, due diligence involves looking into the past and present of the people and structure of a company requesting venture funding. For instance, venture capitalists are wary of investing in companies that lack people with credentials or a proven track record. Depending on the overall level of caution in the investment environment at the time, a due diligence investigation may be more or less stringent.

Due diligence is not a panacea against investment failures. Even a company made up of well-educated high achievers can falter due to unpredictable market conditions, unforeseen competition, or technical setbacks.

Due diligence generally refers to the background checks conducted after a venture partner has already made a decision about the company. Typically, partners will prefer to invest in companies led by people they already know are very trustworthy, and probably have been given funds in the past.

Savvy investors know the tricks of the trade and want to make sure that they don't attach their money, name and reputation to a risky company or person. If you are preparing for due diligence it would be best if you are ready for the following,

• A complete financial and credit history
• A comprehensive criminal and background check
• Personal and professional references that ideally know and are trusted by the potential investors
• A deep competitive and market opportunity analysis. If a savvy investor likes the space they will look to see what other companies exist that could provide better traction or terms

If a perfect stranger came to you and asked for $1 million; What you want to see? How many hoops would you make them jump through?