Early-stage investing is very risky, and it’s impossible to guarantee returns. It is, however, very possible to mitigate some of that risk through thorough due diligence and drawing on the lead investor’s expert opinion.
All investors should research opportunities before investing and consult a financial adviser where necessary. Below is an outline of SyndicateRoom’s internal due diligence.
Due Diligence Overview
How SyndicateRoom Conducts Due Diligence
STEP 1: LEAD INVESTMENT
The first stage of our due diligence comes in the form of set minimum criteria. These show whether an opportunity is in line with our lead-investor model, and help us determine why the company’s existing investors chose to back the business and whether these incentives align with those of our members. (For instance, if the only significant investment comes from the entrepreneur’s mum, that would send up a red flag.)
We also look at whether existing investors are following their money – if not, why not?
The main criteria
- The business is looking to raise a minimum equity funding round of £150,000
- The business is incorporated in the UK or Ireland
- At least 40% of the equity sought is already committed as lead investment
- The round has a named lead investor who can give us a statement about their experience and decision to invest in the company (SyndicateRoom members can read this statement on each company’s investment page)
- The company has secured investment from ‘arm’s length’ investors, i.e. not just the entrepreneur’s relatives or close friends
- SyndicateRoom investors must get the same share class and share price as lead investor
STEP 2: THE FULL REVIEW
The market and product
- We collect independent sources to verify all statements made by the business. This includes commercial contracts stated in the pitch
- We do not review business plans that companies supply directly to would-be investors
- We conduct checks against any patents that the company claims to have in the pitch by checking against publicly accessible registers. We conduct checks against the territories, status and scope
- We do not conduct checks against intellectual property strength or whether it contributes to the company’s competitive advantage
- We check whether the business has at least four months’ cash runway at the time of raising finance
- We check whether the funding round is sufficient to give the business at least seven months’ cash runway after the completion of the funding round
- We check the company’s funding history
- If statements about past performance are made in the pitch, we check these against audited accounts
- We do not review financial projections in the business plans that companies supply directly to would-be investors
- We conduct checks on company directors with relation to:
- KYC (know your customer)
- County Court Judgments
- Past bankruptcies
- Appropriateness of directors’ salaries
- We also make subjective judgements about the team’s ability to deliver on business plans
- We review all relevant legal documents to ensure that SyndicateRoom investors and Fund Twenty8 are able to receive the same share price and share class as the investors making up the lead investment. Where the lead investor is investing for preference shares (for example, if they are a venture capital fund), we will offer SyndicateRoom investors the option to invest in either preference shares or EIS-qualifying shares
- We ensure legal documents contain investor protections, such as pre-emption rights that cannot be waived without consent, drag-along and tag-along, as well as pro-rata distribution of proceeds
- The legal due diligence is often conducted at the end of the funding round, once the documents have been finalised
STEP 3: INVESTMENT COMMITTEE
Once the full review has been conducted, SyndicateRoom’s team of analysts presents the potential investee company to our Investment Committee, during which time the information is further scrutinised.
The Due Diligence Guide for Investors
Compiled by Rob Murray Brown in conjunction with SyndicateRoom, The Due Diligence Guide for Investors helps you cover due diligence checks; what to look for and what to avoid.
Ready to give it a go?
You can find all our available deals on the current investment opportunities page. The individual company pages will tell you what type of round it is, what tax relief the deal is eligible for and, of course, outline details about the company and lead investor. Ready?