The investor who went quiet three weeks into due diligence

We signed heads of terms for £250,000 on a Thursday afternoon and told the team the following Monday. Not the details, just the shape of it: money coming in, two hires we had been putting off, the end of the monthly conversation about which supplier could wait another fortnight. People were pleased. Somebody bought cakes.

Three weeks into due diligence, the replies started arriving later in the day and shorter. Then there was a week with nothing. Then a polite email about portfolio fit and timing, wishing us every success. The whole thing had taken fourteen weeks from first meeting to that email, and we had five months of cash when it began.

Heads of terms are not money

The first thing I misunderstood is that heads of terms are largely non-binding — except for the parts that are, and those parts are the ones that cost you. Confidentiality binds. Who pays which costs binds. And exclusivity binds, which is the one that mattered.

We had agreed an eight-week no-shop clause without treating it as a cost, because at the time it felt like a formality on the way to money. During those eight weeks we stopped two other conversations, one of which had been genuinely warm. By the time we were free to restart them, one had committed elsewhere and the other quite reasonably wanted to know what had happened with the first investor, which is not a conversation that improves your negotiating position.

Put the arithmetic somewhere you can see it. A £250,000 round, six weeks from first meeting to signed heads, eight weeks of exclusivity, and £6,500 of legal and accounting fees committed by the time it collapsed. Cash down £6,500, runway down from five months to two, and the two other funders who might have said yes no longer available. The fees were the small part.

Why it actually fell over

The reason we were given was portfolio fit. The reasons that were actually visible in the data room were three, and I knew about all of them before we started.

One customer represented about 40% of revenue. Our largest product had been built partly by a contractor whose agreement said nothing about assigning the intellectual property to us. And our management accounts, which we ran monthly and found perfectly useful, did not reconcile to the filed year-end figures once someone sat down and tried to bridge them.

Every one of those was fixable given a few months of notice. None of them was fixable in three weeks, in front of an audience, while also running the business. What kills a small round is rarely a single catastrophic discovery — it is the accumulation of things that each need a paragraph of explanation, until the investor's overall impression is that this will be harder work than the next opportunity in their inbox. What investors actually look for before they write a cheque sets out what they are testing for in the first place.

Due diligence does not create problems. It finds the ones you have been living with comfortably for years.

Run diligence on yourself first

The single most useful thing that came out of the whole episode is that we now keep a data room permanently, rather than assembling one in a panic. It is not elaborate — a folder structure and a discipline about putting things in it.

The cap table, agreed and signed, with every share issue documented and every promise anyone has made about future equity written down or explicitly withdrawn. Intellectual property assigned in writing by every founder, employee and contractor who has built anything. Signed, current contracts with your largest customers, rather than an arrangement that has been rolling on since 2021 on the strength of a good relationship. Management accounts that bridge to the filed accounts, with the differences explained. Statutory registers, the PSC register and Companies House filings up to date, since a director whose filings are behind invites questions about everything else — the Companies House letter directors keep ignoring covers what happens when that slides.

And state your worst number yourself, before they find it. Telling an investor in the first meeting that one customer is 40% of revenue, and what you are doing about it, is a completely different conversation from them discovering it in week three. The first is a founder who knows their business. The second is a founder who was hoping nobody would look.

Protect the runway while you raise

Cap exclusivity at four weeks, extendable by agreement. If an investor needs eight weeks of a no-shop to do diligence on a business of your size, they are either not resourced for it or not really committed to it, and both are worth knowing before you hand over the only leverage you have.

Agree who pays what if it collapses. Each side bearing its own costs is normal; investors sometimes ask the company to cover their legal fees, which is negotiable and should be capped in cash terms if you accept it at all. Never agree to an uncapped costs undertaking on a round this size.

Do not spend against money you have not banked. Our most expensive mistake was not the legal bill — it was starting to recruit for two roles and easing off on collections and cost control for a quarter, because relief is a powerful drug and it arrived about ten weeks too early.

Think carefully about what you tell the team, too. I do not regret telling ours that we were raising, because people in a small company can tell when something is going on and the invented explanations are usually worse than the truth. What I regret is the specifics — the amount, the timing, the roles it would pay for. Say that you are talking to investors, that these processes take months and often do not complete, and that you will tell them when there is something certain. Nobody buys cakes for that version, which is rather the point: the fortnight after a collapse is hard enough without also managing the disappointment of people who had already spent the money in their heads.

And keep a plan B that is not equity. A smaller raise from existing shareholders, a working capital facility, or simply a costed plan for running twelve months on your own cash. Having one changes how you behave in the room, because an investor can tell the difference between a founder who wants the money and one who needs it by Friday. The year I turned down an investor and took out a loan instead is one version of that plan B.

What it was worth

Nine months later we raised, from a different investor, and diligence took six weeks rather than fourteen. Not because we had become a better business in the meantime — revenue was up but not transformed — but because everything they asked for already existed in a folder, the contractor IP had been assigned properly, the accounts reconciled, and the customer concentration was down to just under a quarter of revenue and mentioned by us on the first call.

I would not describe the collapsed round as a good experience, and the two months of runway that followed it were genuinely frightening. But the honest version is that we were not fundable in the spring, and the process told us so in the most expensive way available. Doing that work on ourselves first would have cost a few weekends and no legal fees at all.

Common questions

Are heads of terms legally binding?

Mostly not, and deliberately so — the commercial points such as valuation, amount and share class are usually expressed as subject to contract and to satisfactory due diligence. But specific clauses within the same document normally are binding, and they are the ones with teeth: confidentiality, exclusivity or no-shop provisions, and any agreement about who pays costs if the deal does not complete. Read those three clauses as though they are a contract, because they are. In particular, check how long exclusivity runs and whether it extends automatically, since that clause determines how much leverage you have if things go quiet.

How long does due diligence take for a small funding round?

For a round in the low hundreds of thousands, four to eight weeks is a realistic range once heads of terms are signed. What stretches it is almost always the company's own paperwork rather than the investor's process: missing IP assignments, unsigned customer contracts, cap table inconsistencies, and management accounts that do not reconcile to the filed accounts each add rounds of questions. Assume the whole process from first meeting to money in the bank takes three to four months, and plan your runway on that basis rather than on the optimistic version an investor describes in a first meeting.

Who pays the legal fees if a funding round collapses?

Usually each side pays its own, and that is the position to push for. Some investors ask the company to cover their legal costs as a condition of proceeding, which is negotiable — if you accept it, insist on a cash cap and on the cap applying whether or not the deal completes, so a collapse at week ten does not arrive with an open-ended bill attached. Your own costs are a real budget line too: allow for company solicitor fees plus accountancy time to prepare and explain the numbers, and treat that as money at risk rather than a cost of completion.

What most often kills a small funding round in diligence?

Rarely one dramatic discovery. In practice the recurring themes are customer concentration, intellectual property that was built by contractors and never formally assigned, cap tables with undocumented promises attached, and management accounts that cannot be reconciled to the filed statutory accounts. Individually each is survivable and explainable. Together they create an impression that the business will be hard work to own, and the investor quietly moves on to the next opportunity. The defence is to find and fix these yourself before anyone else looks, and to raise the worst of them out loud at the first meeting.