ou want to invest – Good job! But first, you must do your homework!
And unfortunately, that homework means that you must conduct a due diligence process. We know how frustrating and monotonous due diligence is. In fact, we’re aware that this is the least exciting task. However, the reality is that it is the most essential component when it comes to investments.
Due diligence represents the process of a careful and in-depth examination we perform on an investment opportunity or potential business partner before actually committing to it. It’s like doing a background check before shaking hands.
Let’s put it another way! Say you are thinking of funding a startup or even an idea. To determine whether it is a profitable investment or not, you must ensure that what you’re buying is legitimate, safe, and free from any potential risks. How do you do that? By completing due diligence, that’s right! This way, you acquire all the necessary information that will answer all your questions regarding that investment. For instance, you can look into the startup’s legal documents, accounting records, and financials, or speak to the founders and the team to find out more about their product and vision.
But that’s why due diligence is a must!
Actually, as an investor, due diligence should be the first thing you do before deciding to go through with your decision! And the motivation is straightforward: so you don’t lose your money. However, it is crucial to note that due diligence is not a foolproof way to avoid losing money. Even if you do your research, there is always a risk that the company will not be successful.
But look - if you don’t do your due diligence, two outcomes could occur. The first scenario is the happy one, where you get lucky, and there is nothing wrong with the business you invested in. The second one, though, is the unfavorable one, where something did turn out to be fraudulent or risky. And unfortunately, there could be severe consequences, both for you and your company. Not only might this lead to money losses, but it could also have more hazardous effects, such as legal repercussions.
And the worst part? Once our money is gone, we can’t get it back. Investing is a risk, and it’s a long-term commitment – we all know this. But to minimize the risks, we must thoroughly research and plan ahead. After all, we can’t afford to throw our hard-earned money away without being confident that we will actually get it back in return.
Taking risks is always a gamble, but when it comes to investing, they could mean more than just financial; they could also lead to potentially serious legal consequences. So it's essential to carefully weigh our options before taking the plunge, to ensure that our money is not thrown away without any chance of getting it back.
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That’s why the likelihood of our investment being profitable increases with the amount of information and knowledge we have about it.
Through due diligence, we can gain unique insights into how a company operates, what drives its success, and how it differentiates itself from other companies. This way, we will comprehend much better its worth and potential. Plus, it can also help us if we want to negotiate better terms and conditions if we realize that the company will be worth a large sum of money.
On the other hand, some people believe that due diligence is a waste of time because it is impossible to know everything about a company. They believe that it is better to rely on your gut feeling about a company and its potential. We don’t recommend this strategy though - because you know the saying “Better safe than sorry”.
As we said, we recognize the importance of conducting due diligence, but we also acknowledge how tiresome thorough research can be. But think of it like a treasure hunt! The goal is to find precious stones and unknown treasures that are otherwise invisible to the naked eye.
Take a page from Google’s book if you’re not going to take our word for it. In 2019, when Google announced its plans to acquire Fitbit, there were a lot of regulatory approvals needed before the deal was sealed. Why? Because there were concerns about how Google would use Fitbit’s user data.
So, Google and Fitbit were obliged to present considerable paperwork and information to regulators during the regulatory assessment process. Financial data, internal emails and discussions, and information regarding their company procedures were all included.
The regulatory assessment took more than a year, as officials carefully examined the transaction to ensure that it would not hurt competition or consumers. The transaction was eventually authorized, albeit with requirements to preserve consumers' privacy.
Indeed, when we think about all the financial accounts, contracts, and other administrative documents, it doesn’t sound fun anymore. However, there must be one thing in our minds even when we become tired of doing it: the results are worth the effort!
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