What Is Startup Due Diligence, and How to Prepare for Investors

What Is Startup Due Diligence and How to Prepare for Investors?

As a founder, understanding due diligence is essential for securing investment.

It’s not just a word used by investors; it’s a comprehensive process that evaluates the viability of your business, highlighting risks and opportunities.

I’ll briefly cover what due diligence entails and how to prepare for it, so you’re ready to confidently speak with investors.

It's a good idea to have a team member onboard (or outsource it to professionals), that knows how to successfully execute these.

Investors speak to hundreds of startups every day, so if you get a meeting, and show up unprepared, it could potential end that journey before it even started.

What is Due Diligence?

Due diligence refers to the investigative process an investor conducts before committing capital to a business. Basically a deep dive on your startup to discover what they need to know before making an informed decision.

Investors examine everything from your financials to market opportunity, business model, legal aspects, and team to assess the potential risk and reward of backing your startup.

Due diligence varies depending on the stage of investment—pre-seed and seed rounds will typically focus more on market opportunity, customer discovery, competitor advantage and team strength, while later stages include these, it involves deep dives into financial health, metrics, and scalability.

Traction takes many forms, but if you have it in any form, be sure to include it!

Types of Due Diligence

1. Financial Due Diligence: Investors will scrutinise your financial statements, projections, cash flow, burn rate, and capital efficiency. You must have your books in order—mismanaged finances can easily raise red flags.
2. Legal Due Diligence: Expect an investor to verify legal matters such as IP ownership, contracts, incorporation documents, and compliance with local and international laws.
3. Market Due Diligence: Is there sufficient market demand for your solution? Investors will review market size, customer acquisition strategies, competitive landscape, and market positioning.
4. Operational Due Diligence: Investors will want to know how your team operates, how resources are allocated, your go-to-market strategies, and how you handle supply chains, HR, and other logistics.
5. Technology/Product Due Diligence: For tech startups, your product’s scalability, security, and unique features will be carefully examined. Investors will sometimes bring in experts to verify that your technology is feasible and defensible.
6. Traction Due Diligence: One of the most critical factors for investors is traction—evidence that your product or service is gaining market acceptance. Traction is a key indicator that there’s demand for what you’re offering and that your business model is working.

Preparing for Due Diligence

??Organise Your Documentation

Having an accessible and up-to-date data room is key. Investors expect transparency and organisation. This data room should include financial statements, cap tables, legal documents, key contracts, pitch decks, and any supporting documentation about your market and competition.

Centralised Data Room: Use a secure, cloud-based platform (such as Google Drive, Dropbox, or specialised data room platforms like DocSend or CapLinked) to centralise all relevant documents. Make sure it’s well-organised with clearly labeled folders.

Financial Statements: Include up-to-date financial reports like your Profit and Loss (P&L) statement, balance sheet, and cash flow statements. Historical financials (last 2-3 years, if available) and projections for the next 3-5 years should be included.

Cap Tables: Ensure that your cap table accurately reflects the ownership breakdown, including founders, investors, employees with stock options, and any convertible notes or SAFEs (Simple Agreement for Future Equity). Investors will closely scrutinise this to avoid dilution issues.

Legal Documents and IP: Include incorporation documents, bylaws, any shareholder agreements, and proof of IP ownership. Ensure contracts with key partners, vendors, and customers are signed and current.

Pitch Deck & Market Research: Have your latest pitch deck ready, along with any supplementary market research data. Investors often like to see that your assumptions about market demand, competition, and growth are grounded in verifiable data.

??Review Your Financial Health

Financial clarity means accurate financial statements (P&L, balance sheet, cash flow statements), clear cap tables, and coherent revenue forecasts. If you don’t have a CFO, consider hiring a fractional financial consultant to ensure your numbers are well-presented and investor-ready. Even better is if you or a co-founder has a finance background.

P&L and Burn Rate: Investors want to know your current burn rate (how quickly you're spending cash) and runway (how long your cash will last). Ensure your P&L statement is well-organised and shows whether you are on track for revenue and cost projections.

Cash Flow Management: Clear cash flow statements should show how money flows into and out of your business. Ensure projections include key assumptions for expenses, revenue, and capital needed for future growth.

Capital Efficiency: Investors will look at how efficiently you use capital to generate revenue. Highlight your customer acquisition cost (CAC) and customer lifetime value (LTV) ratios. The more capital-efficient your business model, the more attractive it will be to investors.

Revenue Forecasts: Be ready to defend your revenue forecasts by providing a clear explanation of the assumptions behind them. Investors expect realistic, data-driven forecasts, not overly optimistic projections.

Cap Table Clarity: Ensure your cap table is up-to-date and shows clear ownership stakes. Investors will want to avoid issues around future dilution and potential conflicts related to ownership distribution, especially if there are multiple founders or early investors.

??Understand Your Market

Demonstrating an in-depth understanding of your market will build investor confidence. You should be ready to provide data on market size, growth trends, customer needs, and competitive advantage positioning. Know your TAM (Total Addressable Market), SAM (Serviceable Available Market), and SOM (Serviceable Obtainable Market).

TAM, SAM, SOM: Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM) are key metrics. Know how big the overall market is (TAM), how much of it your company can realistically target (SAM), and how much you can capture in the near term (SOM).

Competitive Landscape: Provide a detailed analysis of your direct and indirect competitors. Investors need to understand how your product differentiates itself and where you stand against the competition in terms of features, pricing, and market share.

Customer Insights: Be prepared to discuss your customer discovery process and how you validated customer pain points. Show evidence of your customers’ willingness to pay and their satisfaction with your solution, including feedback or testimonials.

Market Growth Trends: Include industry growth forecasts and trends that could impact your business. Investors want to know how external factors like regulation, technology, or economic shifts could drive or hinder market growth.

Go-to-Market Strategy: Have a clear plan for acquiring and retaining customers. This includes marketing channels, sales strategies, pricing models, and partnerships. Investors will want to know how you’ll penetrate the market effectively.

??Address Legal Concerns

Before approaching investors, resolve any potential legal issues. Ensure your intellectual property is protected, contracts with key partners are secure, and compliance is in order. Legal issues can be a major barrier for investors, so be proactive in addressing them.

IP Protection: Ensure you have full ownership of your intellectual property (IP). This includes patents, trademarks, copyrights, and trade secrets. If applicable, have documentation of filed patents and any legal protection in place.

Compliance: Ensure that your business is compliant with relevant local and international laws and regulations (e.g., GDPR for data privacy, and SEC laws). Investors are wary of legal liabilities that could harm their investment or lead to lawsuits.

Contracts: All contracts with customers, suppliers, partners, and employees should be legally binding and reviewed. Be sure to address any expired, unsigned, or problematic clauses that could raise concerns during due diligence.

Employee Equity and Stock Options: Have clear agreements regarding employee stock options and equity distribution. Potential issues with these agreements can deter investors, especially if employees are unclear about their ownership rights.

Pending Litigation: If there are any current or pending legal disputes, be transparent and provide the necessary documentation. Investors may hesitate to commit if there are unresolved legal battles that could affect future performance.

??Polish Your Product and Operations

Investors look for operational efficiency and product-market fit. Be ready to show customer testimonials, case studies, or metrics that prove your product is solving a real problem. Highlight any operational improvements and how you are set up for scale.

Product-Market Fit: Show strong evidence that your product solves a real problem for your customers. This could be validated through customer reviews, retention metrics, or case studies. Highlight any market traction (e.g., increasing user engagement, revenue growth, partnerships).

Customer Case Studies & Testimonials: Share success stories from current customers who have used your product. Real-world examples of how your product has helped customers overcome challenges will resonate with investors.

Product Roadmap: Provide a clear product roadmap that outlines future development, key features, and milestones. Investors will want to see how your product will evolve and whether you have a solid plan to maintain or extend your market position.

Operational Scalability: Demonstrate that your business operations can scale efficiently. Investors will want to know if your current operations can handle a growing customer base and whether your supply chain, production, and distribution processes are optimised.

Key Metrics: Share important product usage metrics like customer retention rates, lifetime value (LTV), churn, and product engagement. These metrics help investors assess whether your product is gaining traction and if customers are sticking around long term.

??Team and Leadership

Investors invest in people. They want to know that your team is capable of executing your vision. Be prepared to highlight your leadership team’s background, expertise, and commitment to driving the company forward. Some investors (including ourselves) want to see that someone on your team has direct experience in the field that you are building in.

Founder Backgrounds: Highlight the relevant experience and expertise of the founding team. Investors often look for founders who have deep industry knowledge or a track record of success in previous ventures.

Domain Expertise: If possible, demonstrate that someone on your leadership team has direct experience in the field you are operating in. This reassures investors that your team understands the market and the specific challenges you’re likely to face.

Culture & Vision Alignment: Showcase the team’s commitment to the company’s mission and vision. Investors want to ensure that the leadership team is aligned and driven to execute the company’s long-term goals.

Hiring & Talent Strategy: Have a clear plan for scaling your team, especially in key areas like product development, ops, sales, and marketing. Investors want to know how you’ll attract and retain top talent to grow the company.

Advisors and Board Members: If you have advisors or board members with industry connections or notable experience, mention them. A strong engaged advisory team can significantly boost investor confidence.

??Traction and Momentum

Show that your company is not just an idea but one that has proven demand in the market. Present solid metrics that show growth and indicate future success. Traction helps to de-risk the investment for investors and gives them confidence that their capital will help scale an already validated business.

Metrics That Matter Investors will ask to see key performance indicators (KPIs) that demonstrate traction. These can include Monthly Recurring Revenue (MRR), customer acquisition rates, churn rates, user growth, and conversion rates. Ensure these numbers are up-to-date and can be backed by real data.

Customer Validation Investors want proof that your customers love your product. Be prepared to provide customer testimonials, case studies, and user reviews. Additionally, if you have high-profile clients or partnerships, highlight them as strong validation points.

Revenue Growth While early-stage startups may not yet be profitable, investors will expect to see a clear growth trajectory. This could include increasing sales, a growing engaged user base, or a high retention rate. Being able to demonstrate consistent month-over-month or year-over-year growth can really boost investor confidence.

Pipeline & Future Contracts Having a healthy sales pipeline shows investors that your business is well-positioned for future growth. Prepare documentation that outlines deals in the pipeline, letters of intent (LOIs), or contracts that will close in the near future.

Product Usage & Engagement If you’re a SaaS or tech company, investors will look at product engagement metrics such as daily active users (DAU), weekly active users (WAU), and customer retention. These indicators provide insight into how “sticky” your product is and whether customers are finding long-term value in it.

Communicating with Investors

Being prepared for due diligence doesn’t mean you need all the answers upfront, but it does mean being transparent and ready to collaborate. Investors appreciate founders who are open to feedback and willing to work on areas that need improvement.

When investors ask for additional documentation, provide it promptly and clearly. Their requests during due diligence are not only about validation, they are also an opportunity for them to assess your ability to communicate, handle pressure, and maintain transparency. Expect the same in return from aligned investors. This is a 2-way street!

Due diligence is a really important part of the investment process, and thorough preparation can drastically improve your chances of securing funding.

By organising your materials, ensuring financial accuracy, and addressing potential legal, market, and operational concerns, you’ll show investors that you’re running a serious, investable business.

Approach due diligence as an opportunity to refine your business and demonstrate your readiness for growth—because the more prepared you are, the more confident investors will be in their decision to partner with you.

Ask yourself "do I have all of the above in place before I start reaching out to investors"?

If the answer is yes, happy frikin days, let's go!!! ??

If the answer is no, get on it pronto!!!

??Need some help with it to be sure you are reaching out from a position of strength?

Hire our team of venture capitalists and successful entrepreneurs to help you get it all in place AND connect you with our partners to syndicate your fundraise, click the "share" button on this article and send it to my inbox here Kellie O Hara (so I know exactly what you are referring to), with a short message of what you need help with. We will have a short convo prior to hopping on a call with myself and our VC's to determine thee scope needed.

As always, I hope you got some value, thanks for reading.

Kellie “The Startup Whisperer” - a multi hat wearing startup founder/advisor/investor relations executive with a special knack for people, communications & strategy within the AI technology startup and investor space.

HEAD OF INVESTOR RELATIONS Q1 Velocity Venture Capital

PARTNER - INVESTOR RELATIONS RECIPROCITY ROI, LLC

FOUNDER Empire Headhunters

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