Due Diligence for investments just means doing “reasonable” homework to fully investigate what you’re investing in before proceeding. Note that what’s “reasonable” will vary based on how much you’re investing. The amount of due diligence given to a $25 investment would understandably be much less than for a $1M investment.
Typical due diligence categories include:
- Legal (Are all the appropriate documents in order? Is the entity you’re investing in properly structured for its purpose? Are there any Intellectual Property issues or concerns?)
- Financial (Are you satisfied with the terms of the investment, including any fees? Do you know where you stand relative to other creditors and investors? Does the business (or sponsor in the case of a real estate deal) have a realistic budget and financial forecasts for the future?)
- Business (Does the business model make sense? Is this company in a good position to capture an attractive and growing market? Are you satisfied with their sales and marketing strategy? Do you understand the likely exit scenarios?)
- Team (Many investors value the team more than the specific business, especially with startups, where there’s often a need to change course with more market feedback)
While in some cases you may rely on the platform to handle certain aspects of due diligence (for example, a broker-dealer or a Title III Funding Platform must perform background checks on key executives), not all platforms provide the same level of screening.
In some cases you’ll be able to find the relevant information and documents right from within the investment crowdfunding website, but you’ll almost certainly want to supplement that with your own homework elsewhere.