What due diligence is
Due diligence is the process an investor runs to verify a startup's claims before committing capital. It is the check behind the pitch, confirming that what a founder has said about the business actually holds up.
The depth of due diligence varies a lot by stage and by investor. An angel investing a smaller amount at pre-seed might do a lighter check than a VC fund preparing to lead a round, but the purpose is the same either way, reduce the gap between what has been claimed and what is actually true before money changes hands. Some of it can be done by the investor directly, some gets handed to lawyers or accountants, particularly on the legal and financial side, and how much gets outsourced usually scales with the size of the cheque being written.
What due diligence typically covers
- Financials. Revenue, costs, cap table, and any existing liabilities.
- Legal structure. Company incorporation, share structure, contracts, and IP ownership.
- Team. Backgrounds, roles, and whether the team as described is the team actually running the company.
- Market. Whether the market described in the pitch is real and roughly the size claimed.
- Traction. Verifying the metrics a founder has shared, rather than taking them at face value.
How due diligence differs from a deal committee's decision
- Due diligence is the checking. A deal committee's decision is what happens after the checking is done.
- Due diligence can be run by one person or a small team, sometimes with outside help. A decision to invest usually needs sign-off from whoever holds that authority, sometimes a formal deal committee, sometimes just the lead.
- Due diligence can rule a deal out on its own, if something does not hold up, it rarely gets as far as a decision at all.
- Passing due diligence is not the same as getting funded, it just means nothing has been found that rules it out.
