What is Due Diligence?
Due Diligence (DD) is the comprehensive audit and investigation that an investor performs on a startup after signing a Term Sheet but before wiring the money.
Think of the Term Sheet as an "agreement to marry," and Due Diligence as the period where they check your closet for skeletons. If they find something you lied about (or simply forgot to mention), they can—and will—pull the deal.
The Three Pillars of DD
- Commercial DD: Is the market actually real? Investors will call your customers to ask if they actually love the product. They will analyze your churn rates and check your competitors.
- Financial DD: Are the numbers real? They will reconcile your bank statements with your revenue claims. If you said you have £50k MRR but the bank shows £40k, you have a problem.
- Legal DD: Do you own what you sell? Lawyers will check that all IP is assigned to the company (not the founders personally) and that there are no hidden lawsuits or employment disputes.
The Data Room To survive this process, you need a Data Room—a secure cloud folder (Google Drive, Dropbox, or DocSend) containing every important document your company has ever produced:
- Employment contracts.
- Cap table.
- IP assignments.
- Historical financial accounts.
How long does it take? For angels, it might take 2 weeks. For VCs, it typically takes 4 to 6 weeks.
Key Takeaway: Due Diligence is a trust test. The fastest way to kill a deal is to hide bad news. Be transparent, have your Data Room ready, and disclose issues before the investors find them.
