A VC term sheet cannot be created without a significant due diligence process beforehand. This is essential for all VC funds who must assess the potential risks and rewards of investing in a startup.

Due diligence is a detailed examination of the company's financials, past, present, and future, but also non-financial items such as checking the demand for their products, the company's ability to compete, their ownership of their ideas and more.

A due diligence process for VC funds on startups is very similar to that done by investors into mature companies.

Due diligence takes the company's business plan and does an objective check on it. It will also involve a careful check of the company's capitalization table to confirm who the current shareholders are and who has significant control of the company or other rights. There are many more aspects of DD or due diligence that will need to be considered. Any potential investor will be super keen to hear about the potential upside of investing in the company, but will also have to investigate what all the risks and potential downsides may be.

There may be macro issues impacting a company such as new regulations, restricting potential sales in the future, or there may be internal operations issues such as the factory may be at full utilization and unable to provide any more products to service future sales.

The financial reporting system may be slow and cumbersome, so need reviewing into a more time sensitive system.

A thorough DD process may be time consuming, but it's considered time well spent. Investors will want full clarity on the company before investing, and it's particularly important when looking at private companies which have very few requirements to make company information publicly available.

Unlike investing in more established companies with the longer histories, startup company due diligence can have different priorities. Startups will have less substantial evidence to demonstrate their value as the company is relatively new, and some aspects of the business growth plan may be unproven at this time. It's harder for a VC fund to become comfortable with the potential risks and Rewards of investing in that startup, given it would have an increased quantity of unknowns compared to a mature company.

However, this is also where the VC expertise would weigh in.

VC analysts look at key aspects of startup businesses and will work hard to look at the potential growth of the company to evaluate whether it justifies investments. Venture capitalists are also able to quantify what value they themselves can bring to the business.

The funds may be experienced in a certain sector such as artificial intelligence or biotech, so keen to apply its existing knowledge onto new ventures, or it may be targeting investment at companies at a certain stage in its growth. So we can use its experience such as expanding distribution or production to add significant scale to the company and therefore growth.