It’s not uncommon to see African startups fail. In fact, reports suggest that between 70% and 80% of startups on the continent fail within their first three years. While there are many reasons for this unfortunate reality, one of them is commonly overlooked and underrated: due diligence.
Due diligence is a thorough investigation that examines your startup’s overall health — from strengths to weaknesses, as well as potential difficulties that may come up. Startups as well as investors can also conduct due diligence and perform risk assessments to determine their risk level.
In this article, we’ll show you how you can conduct adequate due diligence for your startup. We’ll start by exploring the concept of due diligence and then share the steps for carrying out proper risk assessment for your startup.
What are the types of due diligence for African startups?
For practical risk assessment, there are some key areas you need to consider.
Some of the critical areas to consider when performing due diligence are:
- Financial due diligence: The financial status of your startup is the driving force that projects its growth. Assessing it means you are analyzing your revenue streams, your profitability, and your burn rate. That way, you’re checking for a balance between your source of income, your profit generation, and the rate at which the monies are spent.
- Market due diligence: Understanding your target market is vital if you want your startup to succeed. Assess the size of your target market, your competition, and the growing market trends. Use our resources, industry reports and government data to stay up-to-date with market opportunities.
- Legal due diligence: Ensuring your startup complies with all appropriate regulations protects its legal standing in the industry. Make sure that your startup is registered and that it is adhering to specific regulations in your industry. Consult experienced lawyers in the African business for your legal status is essential. You can check the American Bar Association (ABA) to guide you to African legal experts.
- Technical due diligence: If your startup is tech-based, you must have a solid technical footing. Technical due diligence ensures that your products and services are safe and will function effectively at scale. Assess your startup’s infrastructure, IT systems, scalability, and safety measures effectively.
What is the due diligence checklist for African startups?
Before seeking out investors for your startup, you should conduct due diligence on your startup first. Doing this allows you to identify and address risks faster while building investors’ confidence in your business.
Here is a checklist of things you need to do before carrying out due diligence on your startup:
- Refine your business plan: Make sure your business plan is mapped out and sums up the mission, vision, and value proposition of your company. Have a detailed market analysis that shows not just your target market but also your competition and market trends you are following. Include a thorough, realistic financial plan with projections for revenue, profitability, and expenses.
- Get a legal professional: Get an experienced lawyer in business law to review your legal documents.
- Conduct market research: Analyze the size, demographics, and needs of your target market. Look into the strengths and weaknesses of your competitors, and use your available resources to conduct customer surveys.
- Make financial forecasts: Develop financial projections for the next 3-5 years for revenue streams, burn rate, and operating expenses. Include critical financial metrics like future profitability and break-even points.
- Assemble a strong team: Assemble a capable team with expertise and capabilities to match to properly execute your business plan. You will need a team of experts in finance, management, marketing, and technology.
- Prepare for due diligence: Gather all relevant documents—business plans, financial, and legal. Predict investor questions, prepare confident answers., and practice your pitch and presentation in a way that communicates your startup’s vision.
How to conduct due diligence for your startup
You can assess risks by examining your startup’s financial health, market potential, legal status, and technical infrastructure. With thorough due diligence, you will have enough information to recognise and mitigate risks.
Here’s a quick guide to assess your startup:
- Recognise and address regulatory limitations by understanding legal laws and ensuring complete compliance.
- Evaluate your finances and assess your market opportunity so as to easily secure funding and dispense it accordingly.
- Identify unexpected customer needs and strong competition, which will help you adjust your product and services accordingly.
- Build a safe technological basis that ensures that your infrastructure can protect your data from security threats, as well as handle your growth rate.
How to conduct risk assessment for African startups
To effectively conduct due diligence and assess your risks, there are practical steps you need to follow.
The steps involved in conducting a risk assessment for your startup are:
- Preparation
- Information and data collection
- Analysis and documentation
Let’s explore what these steps entail.
1. Preparation
You have to determine the goal of your assessment—partnership or pre-investment—to guide you on the amount of detailing you need to do. According to how complex the evaluation will be, gather a team of professionals familiar with the African startup ecosystem—accountants, lawyers, and market research specialists.
2. Information and data collection
You have to gather enough available data to be thoroughly screened. For financial due diligence, gather account statements, balance sheets, and anything that can be linked to cash flow.
For legal due diligence, gather company registration and ownership documents, intellectual property inclusive. For market due diligence, collect data on customer traction and reach, and possibly, predetermine market scalability.
For technical due diligence, get a list of all infrastructure at your disposal and their working status. If you are a tech startup, present your company’s development process and team capabilities for assessment.
3. Analysis and documentation
With the help of the group of professionals you have gathered, analyze all data and information that has been gathered and identify potential opportunities and risks. Document the risk assessment results and other findings in a clear and concise report. Create a plan to minimize or address the identified risks m, based on the report put together. Throughout the process of due diligence, ensure proper handling of sensitive information.
For more accessible documentation, use document management tools and, if possible, due diligence automation tools. You can find some trustworthy options online.
Conclusion
Due diligence is a crucial process for African startups. It’s not just about ticking boxes — it’s about gaining a deep understanding of your startup’s strengths, weaknesses, and potential risks. By systematically assessing your startup, you can identify and mitigate risks early on — setting your business on a path toward sustainable growth.
