Due Diligence
The comprehensive investigation investors conduct before finalizing an investment in a startup.
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Definition
Due diligence is the systematic investigation that investors conduct between signing a term sheet and closing a funding round. It verifies the claims made during fundraising, identifies risks, and confirms that the investment thesis is sound.
Due diligence covers multiple areas: financial (revenue, expenses, projections), legal (IP, contracts, compliance), technical (code quality, architecture, security), commercial (customer references, market analysis), and team (background checks, references).
The depth of due diligence increases with round size. Seed rounds may involve minimal diligence, while Series B+ rounds include extensive financial audits, customer interviews, and technical assessments that can take 4-8 weeks.
Why It Matters for Founders
Being prepared for due diligence accelerates fundraising and builds investor confidence. Companies with clean data rooms, organized financials, and clear documentation close rounds faster and on better terms.
Due diligence failures can kill deals. Common red flags include: undisclosed liabilities, IP ownership issues, customer concentration risk, founder disputes, and financial irregularities. Proactive founders maintain "always ready" data rooms to accelerate the process.
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Real-World Example
During Series A due diligence, investors review: financial statements, customer contracts, retention cohorts, cap table, IP ownership, employee agreements, tax records, and conduct customer reference calls.
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