Due Diligence
The structured investigation an investor or acquirer performs to verify a company's claims before committing money.
Definition
Due diligence is the period between a signed term sheet and a closed deal when the investor checks that the business is what the pitch deck said it was. The company shares documents in a data room, answers detailed questions, and often provides access to customers, financials, and code. In venture rounds it typically takes two to six weeks. In mergers and acquisitions it is far deeper and can take months.
Areas Investors Examine
Financial
Revenue, burn, bank statements, and whether the metrics in the deck reconcile with the books
Legal
Incorporation documents, cap table, IP assignments, contracts, and any pending disputes
Commercial
Customer reference calls, pipeline quality, churn, and competitive position
Technical and Team
Code review, security posture, key hires, and founder background checks
How Founders Prepare
- Build the Data Room Early: Organize documents before the term sheet, not after
- Reconcile the Numbers: Every metric in the deck should trace back to a source
- Clean the Cap Table: Unresolved equity promises are a common deal killer
- Own the IP: Confirm every contributor has signed an assignment agreement
- Line Up References: Warn the customers you plan to offer as references
- Disclose Proactively: Surprises found late in diligence cost more than ones you raise yourself
Real-World Example
Theranos: The cost of skipping diligence
Theranos raised hundreds of millions of dollars from investors who largely accepted the company's claims without independent technical verification. When the technology was later shown not to work, the case became the standard cautionary tale for why investors insist on rigorous due diligence, and why founders should expect it.