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Startup Due Diligence in 2024: Insider Secrets & Approach

Kison Patel
Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of M&A Science and FirmRoom

A misconception that sometimes arises is that startup due diligence - where startup prepare for due diligence before seeking investor capital - isn’t as important as due diligence for more mature companies.

This is a fallacy and to think otherwise, can sabotage a startup’s chances of achieving its funding goals.

Conducted well, startup due diligence can set newly founded companies apart from their competitors.

FirmRoom has been a catalyst to startup fundraising success. In this guide, we leverage our experience and share vital tips for startup due diligence in 2024.

What is Startup Due Diligence?

Startup due diligence refers to the investigation, audit, and analysis of startup companies before investing in them.

What is Startup Due Diligence?

Those conducting the due diligence for startups have the same motivations as anybody else conducting due diligence: They aim to find to find the information that gives them a complete picture of the target company, and in particular, anything which has the potential to destroy value therein.

From the perspective of the startup, this means that due diligence offers an opportunity to show investors that the company has got its house in order.

While investors will understand that your focus is growth, they’re also keen to see that you can keep a company organized while overseeing that growth.


Furthermore, it makes their decision an easier one to make, which is something that all startup founders should be interested in.

How to Prepare for Startup Due Diligence?

A good start to think about startup due diligence is:

‘what questions would I want to ask if I was an outside about to invest in this company?’

You’ll probably be aware of the concerns - there’s a good chance that your family or friends (at least the more honest ones), will have raised some of these concerns with you about the business before.

And even a casual chat with a VC investor will tend to throw up some of the questions that you’ll need to resolve.

Who should be involved in preparation for startup due diligence?

Most young startups don’t have many employees. This is good from an investor perspective, who tend to frown upon labor-intensive businesses.

On the other hand, it does mean that the founder will be far more involved in preparation for due diligence.

However, call in outside expert help as much as possible: CPAs for the financial statements and pro-forma statements, legal counsel for the legal aspects of the business, IT to describe the tech stack, etc.

Importance of Startup Due Diligence

Without a short history that provides very track record for investors to work from, startups should look at the due diligence process as an opportunity to show them why they should invest.

Perhaps your business is looking to start a new concept, product, or service, that hasn’t been tested on the market before. Due diligence is your chance to show investors that your company is ideally positioned to capture market share.

Secondly, you can be 100% sure that an investor will conduct due diligence.

Due diligence is probably the only certainty of any fundraising process. Investors aren’t inclined to throw capital at a company that they haven’t properly investigated beforehand.

Armed with this knowledge, startup companies can maximize their chances of achieving funding by preparing their due diligence ahead of time, showing investors that you’re going to be easy to work with.

Importance of having a data room for due diligence

Who better to ask about the importance of having a data room for due diligence than an experienced VC investor?

Alex Toh of SC Ventures has recently said:

“To help facilitate a smooth due diligence process, startups need to have set up data rooms ready to be released and updated as and when potential investors are keen to review. This instils confidence among the investors and helps establish a good rapport with the founders from the get-go.”
Alex Toh, SC Ventures

Startup Areas and Functions Analyzed in Due Diligence

Investors tend to view startups under a number of headings, with many placing more emphasis on the financials and the product/service than any other area. These areas usually include:

1. Financials

The number one reason any investor invests in a startup is its financials; ensure they’re created well, tell the company’s growth story, and are accurate.

2. Product/service

Wherein the major question is: What pain point does your product/service address, and why does it do this better than everybody else?

3. Market/opportunity

There may be a great product, but if the market for it isn’t big (think Peter Thiel’s British restaurant market story), then they’re not investing.

4. Competition

It’s always a temptation for companies to believe there’s no competition. There is competition and a good tip is to never say that there isn’t.

5. Management team

The investors will want to know that you’re capable of delivering the company goals and whether they’re capable of working with you.

6. Intellectual property

Investors love IP but only if it’s valuable IP. Highlight valuable IP if your company has it; if you’ve trademarked your company name, it usually isn’t of great importance.

7. Current customers

If the company has a current set of customers, show the breakdown, perhaps even why these clients chose you over the others.

8. Legal compliance

The company will have to comply with at least some regulations (e.g. IP usage), so this will show investors that everything at the company is compliant.

What do Investors Look For?

Whatever the product or service your company is pitching, the investors tend to always look for certain characteristics in companies.

Disruptive business

Remarkably few business models are truly disruptive, but that doesn’t stop founders from making claims around being disruptive. If your company is disruptive, make sure that this is front and center, explaining exactly why that is the case.

Product/market fit

As mentioned above, a good product doesn’t always mean that there’s a market. Investors will not only look at the market, but also where the company’s product or service fits in with the existing offerings.

Cash flow/profitability

Investors want to see how quickly they’ll get the money back. They’ll look at everything from quality of cash flows and seasonality to customer lifetime value and churn to find their answer.

Scalability and potential for growth

Labor-intensive businesses tend to be less scalable, which explains the mass investor movement towards tech-enabled businesses. Investors love scalability, which clearly enables them to see their future payoff.

Tem composition and experience

Good management teams inspire confidence in investors. In some ways, the management team should sell the business before the investors have even seen the business model.

Competitive advantage

Similar to ‘disruptive business model,’ competitive advantage shows investors that there is almost no way that the company cannot succeed, and is a huge incentive for them to invest their capital.

Exit strategy

The vast majority of startup investors are only looking to be on board for around 5 years. Hence, when they’re looking at an investment, they’ll also consider whether there are exit options for them that will exist in the mid-term.

By now, if you’re a startup founder, you should be seeing that the information that investors are going to look for in due diligence can add up quickly.

This is not something that can be done through back-and-forth email conversations.

A good virtual data room package will enable the investors to see all of the necessary documents in a structured format, reducing their heartache and time spent deciding.

So…add ‘virtual data room’ to the list above.

Research to conduct before due diligence

As should be clear by now, investors’ time is precious.

When they’re rifling through documents and asking for things to be resent, they’re not getting paid.

Rather, this is an expense to them. As such, you should know in advance which investors are most likely to be interested in investing in your business (all investors outline their investment theses on their websites), how much they’ll be willing to invest, and what other characteristics your company should have.

As one VC investor recently stated:

“While it is tempting to do a ‘spray and pray’ to all venture capital investors, as more investors are willing to speak over a video conference, a customized note still differentiates your company.”

Heed these wise words. Know which VC companies are suited to your product or service (use their investment portfolio as a proxy), and tailor your message as best as possible to appeal to them.

Issues in Due Diligence and Improving the Fundraising Efforts

There are essentially two ways to improve the fundraising efforts (most of which will focus on due diligence). These are:

  1. Create a more powerful investor proposition
  2. Improve your due diligence process

Here’s something that many startup founders fail to consider about these two points:

Number 2 can help achieve number 1.

By working more on preparing for due diligence, you’re more likely to find the holes in your company’s investor proposition. Other issues to consider when preparing for due diligence include:

  • Know the investor: As outlined above, the ‘spray and pray’ approach is less likely to yield positive outcomes.
  • Be transparent: Information withheld, if negative, will often be looked upon as poorly as lying, so be completely transparent in the due diligence process.
  • Have a virtual data room: Aside from the organization, a VDR ensures data protection, which is something increasingly important to investors.
  • Tailor the message: As one investor recently shared:
“As a startup’s traction changes very quickly, a good practice is to segment data rooms for each investor so that you know what you provided to each and at what dates.”

FirmRoom's startup tailored data room was specifically designed to streamline the startup due diligence process.

Increase your chance of receiving funding and impress your investors with a seamless document organization.

Startup due diligence checklist


The benefits of having a virtual data room for startup due diligence should by now be clear for founders.

The VDR is considered the industry standard when looking to raise capital and the sooner you know how each one works, and the best way to leverage them, the sooner you can put together your investor-ready due diligence package.

Frequently Asked Questions (FAQs)

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Key takeaways

Startup Fundraising Due Diligence Checklist

Step into investors' shoes with our expert-crafted Startup Due Diligence Checklist. Streamline your preparations, surpass investor expectations, and accelerate your funding journey.

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