Due diligence is the investigative process investors conduct before finalizing investment—verifying financials, legal compliance, customer claims, team backgrounds, and product functionality. It's the trust-but-verify phase after term sheet.
Post-term sheet, investors audit everything you claimed. Categories: (1) Financial DD—revenue numbers, burn rate, cap table, tax filings. They'll request bank statements, invoices, ARR breakdown, cohort analysis. (2) Legal DD—company registration, IP ownership, founder agreements, employment contracts, compliance. Lawyer reviews for red flags. (3) Technical DD—code quality, architecture scalability, security vulnerabilities. Often hire external CTO-as-service. (4) Market DD—customer references, competitor analysis, market size validation. Call your customers to verify claims. (5) Team DD—background checks, reference calls on founders/key employees. Verify education, past roles, no criminal history. (6) Product DD—use product extensively, security audit, check claimed features actually work. Process: Investors send DD request list (50-100 documents). You upload to virtual data room. They spend 2-4 weeks reviewing, asking follow-ups. If red flags found: Re-negotiate terms (lower valuation), add protection clauses, or walk away from deal. DD kills deals: Inflated revenue (booking vs cash mismatch), IP not owned by company (co-founder wrote code as consultant elsewhere), co-founder undisclosed lawsuit, product doesn't work as demoed, customer references are fake. Prep for DD: Clean cap table, org all contracts in Google Drive, practice customer reference calls, fix known IP/legal issues BEFORE fundraising.
Due diligence failure. Walgreens invested without technical DD on blood testing claims. Product was fake. $9B valuation → $0, criminal charges.
Investor requests: Stripe dashboard (revenue proof), customer interviews (reference calls), GitHub access (code review), cap table (ownership verification). Takes 3 weeks, no issues, deal closes.
Founder claimed ₹50L ARR. DD revealed ₹30L was from single pilot customer who verbally said won't renew. Investor walked away.
DD is where deals die. 20-30% of term sheets don't close due to DD issues. Clean DD process = faster close, original terms maintained. Messy DD = re-negotiations, delays, deal death. Founder credibility established here—if you lied about small thing, investors assume bigger lies. Be radically transparent.
Seed: 2-3 weeks. Series A: 4-6 weeks. Series B+: 6-8 weeks. Can be faster if you're organized (data room ready) or slower if red flags found.
Minor: You fix and proceed (missing contract, small legal compliance). Major: Re-negotiate terms (lower valuation) or investor walks away (fake revenue, IP issues, fraud).
No. Refusing = investor walks away. If you have sensitive data (customer lists), use NDAs, restricted access, watermarked documents. But must provide requested info.
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