3.2 Due Dilligence
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What Is Venture Due Diligence?
Due diligence is the systematic process of evaluating a startup’s team, product, market, financials, legal status, and more — to validate claims, assess risk, and deepen understanding before making an investment decision.
It’s not about eliminating risk — it’s about understanding what you're buying into, and whether that risk is worth the upside.
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Core Areas of Due Diligence
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​Each VC firm may have its own checklist, but most diligence processes focus on the following categories:
Team Diligence
Venture capital is a bet on people. Team diligence asks:
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Who are the founders, and what’s their track record?
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Are their skills complementary?
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Have they worked together before?
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How do they handle conflict, failure, and feedback?
This may involve reference calls, background checks, and behavioral interviews. Red flags here — even subtle ones — can be deal-breakers.
Product & Technology Diligence
Especially for technical startups, product diligence is critical:
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What exactly has been built, and does it work?
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What’s the product roadmap, and is it credible?
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Is there defensible IP, and is it properly owned?
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How difficult would it be for others to replicate this?
In some cases, VCs bring in technical experts to conduct audits or run demo tests.
Market & Industry Diligence
A great team with a weak market is still a bad investment. This phase explores:
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Is the Total Addressable Market (TAM) big enough?
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Who are the existing players, and what’s the competitive landscape?
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Are there macro trends driving or inhibiting adoption?
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What are the barriers to entry and go-to-market challenges?
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This often involves speaking to customers, analysts, or operators in the space.​
Traction & Growth Diligence
Even early-stage companies should show some signs of momentum. VCs assess:
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Customer acquisition and retention data
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Revenue growth (if any), user engagement, or other KPIs
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Churn rates, conversion metrics, and customer feedback
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Sales pipeline or letters of intent
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The goal is to understand whether traction supports the story being told.
Legal, Cap Table & Compliance Diligence
This is where lawyers get involved. Common checks include:
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A clean, accurate cap table
Founder equity and vesting schedules
Prior SAFEs, convertible notes, or side letters
IP ownership (who actually owns the code?)
Regulatory or compliance risks in the business model
Legal Document Review
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If things look messy here, it could delay — or kill — the deal.
How Due Diligence Unfolds
The diligence process typically happens in phases, often over weeks or months.
Steps include:
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Initial Screening & First Meeting
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Quick filter to assess founder fit and initial story
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Data Room Access & Document Review
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Reviewing financials, product docs, pitch decks, and customer materials
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Founder Deep Dive
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One or more extended calls digging into strategy, risk, and team dynamics
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Expert Input or Reference Calls
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Tech audits, customer calls, market expert opinions
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Internal Partner Review
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Synthesizing findings into a Deal Memo (next lesson) and preparing for IC
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Recommended Reading – VC Due Diligence
Here are some of the best resources available online to help you deepen your understanding of venture capital due diligence:
Affinity – Venture Capital Due Diligence Best Practices
A high-level guide that outlines the six critical areas VCs focus on: financials, legal compliance, market analysis, product viability, business model sustainability, and founder/team.
OpenVC – The Ultimate Guide to Venture Capital Due Diligence
Comprehensive walkthrough covering why diligence matters, what areas to evaluate, and how it protects both investors and founders. Very accessible and beginner friendly.
Kruze Consulting – VC Due Diligence Checklist: Pre‑Seed to Series B
Tailored diligence checklists by stage (pre-seed, seed, Series A, B) with clear examples of key documents, financials, and legal items VCs expect.
Edda – VC Due Diligence for Investors Investing in Startups
Guide for both founders and investors, explaining how diligence adapts across stages—from team or idea focus at early stage to deep operational/financial scrutiny later. Edda Blog
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Dataroom Providers – Startup Due Diligence Best Practices
Clean summary of diligence stages and oversight areas: people, financials, product, market, business model, cap table, legal, and risk management—plus format-friendly checklist. OpenVC+9Dataroom Providers+9Kruze Consulting+9
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